How Markets and Other Institutions Shape Preferences

Our project encompasses three themes, all of which help to understand the overarching questions of the project.

Theme 1. Does market interaction influence morality?

Countless scholars have debated whether market interactions influence morality. The undertone has been that markets cause a change in human nature. However, Dufwenberg et al (2022) (DJSKLS) brought in a new angle. They argued that if humans are motivated by reciprocity – i.e., they want to be kind or unkind to others depending on whether others were kind or unkind to them – then this single utility-notion generates interesting predictions without assuming that markets per se change motivations. As a by-product of voluntary trade, buyers and sellers come to view each other as kind and that sentiment can spill over so that traders are also kind to each other outside the markets. DJSKLS formulated this rosy prediction theoretically, ran an experimental test, and reported support.

As important as DJSKLS’s result, it is limited in several ways. Their context was simplified as it precluded three possible environments with, respectively, inequality, social mobility and fraud. Enriching the environments to include these possibilities will potentially impact the conclusions about market morality. We propose to extend this work in these three important directions:

i. Inequality: Many markets create unequal gains. There is ample evidence in economics that when gains get distributed unequally, this can be a source for tension and conflict (e.g., Gangadharan et al, 2021). One may wonder whether the previously mentioned positive effects on spillover kindness diminish in contexts with unequal gains, but DJSKLS do not consider this possibility by design. We aim to explore this matter by examining, theoretically and experimentally, how markets (and aftermarkets) influence kindness when gains are unequal.

ii. Social Mobility: DJSKLS also do not allow for the possibility of social mobility; in this subproject we enrich the environment to allow it. There are theoretical reasons to expect tensions to diminish when generations ‘take turns’ at reaping profits, and we describe such effect formally and test them for empirical relevance experimentally.

iii. Fraud: Many market institutions create opportunities for one party to fool another, e.g., by selling damaged goods without disclosure. DJSKLS ruled such considerations out by design; had fraud been an issue, one might have expected unkindness (rather than kindness) to spill over. We propose to explore, highlight, and categorize situations that are amenable to fraud in markets, and develop behavioural theory (including, as indicated above, with reference to reciprocity), and to design and run experiments that can provide a compelling test for empirical relevance.

All three of the above sub-themes will be examined separately, which will allow us to comprehensively study the impact of each. Further, we aim to explore two other research themes, both related by being centered around the overarching question of how institutions shape the mindset and behaviour of those who engage with them. We discuss these below.

Theme 2. Measuring Preferences under Different Institutions

The overarching goal of this second theme is to measure the influence of institutions, especially markets, on individuals' behaviour. The first theme described above involved inter alia understanding human motivation in situations with potentially unfair outcomes, such as inequality. How people view the fairness of these settings could therefore be important in comprehensively understanding people’s behaviour. For instance, if citizens have experiences with market institutions that are contrary to their idea of fairness, they may emerge from those experiences less willing to comply with regulations and with less trust in these institutions. This theme adds to the existing parts by designing a novel method to measure preferences for fairness under different institutional settings. In particular, we design a simple yet powerful elicitation method to jointly measure how people trade-off between efficiency, equality of opportunities and equality of outcomes and whether these preferences change depending on the institutional environment, for example, under a free market or institutions that prioritise redistribution. This adds another dimension and provides a more detailed picture for comprehending the impact of institutions on human motivations.

Theme 3. Tax Evasion and Social Image

This project combines and explores two ideas that different sets of distinguished economists have stressed. First, a large literature in public finance argues that when studying tax-evasion it is important to take into account aspects of morality and psychological aspects that to some degree mitigate tax payers’ inclinations to evade taxes. Second, recent work by behavioural economists reported evidence that many decision makers are concerned with what is called their social image, in particular that they do not like to be perceived to be cheating. We propose to develop a model which will allow us to describe a context where tax payers and a tax authority interact. In this context, we will examine and incorporate a social image concern of the kind mentioned above. Our exercise will generate novel implications of interest to scholars in public finance, informed by cutting-edge insights from behavioural economics. This project connects to the others in our application as this one too focuses on a key institution – the taxation system – and builds on ideas from behavioural economics to understand human motivation within this institution.