HISTORY DEPENDENCE AND THE FORMATION OF SOCIAL PREFERENCES: AN EXPERIMENTAL STUDY

I. INTRODUCTION Over the past three decades experimental economics has identified a number of settings where players in noncooperative games make choices that are inconsistent with maximizing their own monetary payoffs but allow them to help or harm others. For example, responders in ultimatum games consistently reject positive offers (Gtith, Schmittberger, and Schwartz 1982; Roth 1995). Participants in VCM public goods games consistently contribute positive amounts to the public good (Ledyard 1995). To explain this "other-regarding" behavior, various theories of "social" preferences have been advanced. (1) In the most popular models, Fehr and Schmidt (1999) and Bolton and Ockenfels (2000), individuals care about not only their own outcomes but also the outcomes of others. By expanding the domain of preferences, such models provide a unified explanation within the framework of classical microeconomics for behavior in many experiments. Reflecting their roots in classical microeconomics, a common feature of these distributional models of social preferences is an implicit assumption that preferences are complete and stable. It follows that these models are inherently static, rendering them unable to address how social preferences are formed when individuals are faced with a novel situation. This question is pertinent since other-regarding behavior has been shown to change with experience in a number of experiments (e.g., Andreoni 1988; Armantier 2006; Cooper and Dutcher 2009; Cooper et al. 2003; List and Cherry 2000; Roth et al. 1991; Slonim and Roth 1998). Such changes occur even if strategic uncertainty, payoff uncertainty, reduced error rates with experience, and repeated game effects are ruled out as possible explanations (Cooper and Stockman 2002a). (2) By process of elimination, something related to subjects' social preferences must be responsible for their changing behavior. Cooper and Stockman (2002a) is arguably the clearest illustration of the preceding points. We studied the minimal contributing set (MCS) game, a sequential step-level public goods game with three players. Each player faces a binary decision: whether or not to contribute to a public good. If a player decides to contribute, a player-specific cost of contribution is deducted from their initial endowment. The public good is provided if at least two players choose to contribute. For each player, the value of the public good is greater than their cost of contribution. It follows that in the unique subgame perfect equilibrium the final two players choose to contribute and the public good is provided. The catch is that the cost of contribution is sharply rising through the order of play. A critical third player, defined as a third player who knows that exactly one of the two preceding players has contributed, therefore faces a dilemma. If this player contributes they gain the benefits of the public good, but those benefits will also be enjoyed by an individual with far lower costs of contribution who has chosen not to contribute. As reported in Cooper and Stockman (2002a), the MCS game yields substantial levels of other-regarding behavior, specifically negative reciprocity; depending on the treatment, up to 50% of critical third players do not contribute. More to the point, the behavior of critical third players in the MCS game changes with experience. In the most interesting case, the contribution rate by critical third players falls sharply with experience, dropping from an initial contribution rate of 80% to a low point of 50%. By extension, the average monetary payoff of critical third players declines with experience. Subjects are randomly rematched in each round, so repeated game effects cannot be responsible for this decline and the magnitude of the change is hard to square with subject errors in what is, after all, a straightforward binary choice. (3) Because this is a sequential game with perfect information, we can eliminate obvious causes for changes in the behavior of third players such as the resolution of strategic and/or payoff uncertainty. …