Monday, November 26, 2012

On the economics of generosity

Good morning economists. A while back, we discussed the idea of the dictator game in economics where a subject is given a specific amount of money and is presented with an opportunity to share his/her endowment with a second person. The conclusions for this game reveal that people are more altruistic than economic theory presents them to be. They are indeed prepared to share as opposed to keeping the entire amount for themselves, however, one needs to ask what their guiding motive is.

A while back, I was walking along a busy street with my significant other, when we discovered a wallet lying on the pavement. We picked it up and noticed that there were a couple of credit cards inside together with a photo ID of the owner and also some cash as well. Without a second thought we presented the wallet to the police that returned it to its rightful owner. Of course a wallet with 30 something Euro did not impose any moral dilemma.

The second story from Sacramento USA, involves two ventilation workers who discovered $300.000 worth of gold dust stored away in 12 jars of baby food as they were working underneath the floor grid. They were both extremely surprised. One of the workers admitted that he thought about keeping the gold, but eventually he returned it to the homeowner. Could it be that he was forced into this action since his co-worker knew about the find? Plus, let us face it...it would have been difficult to remove 12 jars of gold dust without being discovered by the homeowner.

Herein lies the answer as to why the dictator game shows behavior which departs from the parameters of economic theory. INFORMATION. In the dictator game all the subjects know how the game is played. Even the receiver knows that the dictator has an endowment that may be shared between the two. If the receiver did not know about the endowment, the sense of altruism that the dictator feels from sharing is immediately nullified. As such he/she would most probably keep the entire sum instead of sharing. I am willing to bet that if the worker described above was working alone and the owner was not at home those jars of gold would have disappeared in a few seconds.

Overall, generosity can be triggered by symmetric information between two or more subjects. The greater the asymmetry, the lower the urge to be generous!

Have a generous day!

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