Hillman 2009 Social justice Chapter 7 Bentham and Rawls as limiting cases U 1 U 1 Bentham A 45 o 45 0 Rawls General symmetric B D social welfare function H 45 0 U 2 U 2 O O The slope of a social Limiting cases of social welfare contour welfare and social expresses relative insurance contracts social weights Bentham and Rawls are limiting cases of aversion to inequality 26
Hillman 2009 Social justice Chapter 7 U 1 U 1 Rawls Bentham 45 o 4 5 o F 1 F 1 E Rawls B A F 2 Bentham F 2 U 2 O U 2 O An extremely leaky With no leaky bucket, bucket: Rawls continues Bentham and Rawls to provide social provide complete insurance but Bentham insurance provides no social insurance With no leaks in the bucket of redistribution, aversion to inequality does not affect social insurance Any symmetric social welfare function provides complete insurance and ex-post equality 27
Hillman 2009 Social justice Chapter 7 The reason for different social insurance provided by different social welfare functions is different sensitivities to the efficiency costs of redistribution through the leaky bucket Bentham is the most sensitive to efficiency costs of redistribution through the leaky bucket Rawls is not sensitive to efficiency losses at all as long as the worst-off person is not harmed 28
Hillman 2009 Social justice Chapter 7 The Laffer curve and income redistribution The Laffer curve limits the amount of tax revenue that is available for redistribution of income Tax revenue R U 1 Bentham Max R 4 5 0 at point S G 1 or G 2 F 1 B 1 W 2 G 1 E Rawls W 1 O G 2 t M Tax rate t B 2 A W 0 F 2 Both the taxpayer and the transfer recipient lose when the tax rate exceeds t M . U 2 O V Social insurance with a The Laffer curve as a revenue constraint constraint on redistribution 29
Hillman 2009 Social justice Chapter 7 The Laffer curve can prevent complete insurance when Rawls is chosen Bentham social insurance is never hindered by the revenue constraint of the Laffer curve 30
Hillman 2009 Social justice Chapter 7 The choice of the social insurance contract Behind the veil of ignorance, will people choose Bentham or Rawls? The case for choosing Bentham Rational behavior under uncertainty is maximization of expected utility Expected utility is defined by giving weights to different outcomes equal to the objective probabilities of the different outcomes arising 31
Hillman 2009 Social justice Chapter 7 n people behind a veil of ignorance know that H L n n n After the Bentham social insurance contract has been implemented through taxation and income transfers H L U U H H L L W n U n U H n n H p probability of having highincome L n n L p probability of having lowincome . W n H H L L p U p U EU 32
Hillman 2009 Social justice Chapter 7 Choice of a Bentham social welfare function behind the veil of ignorance is rational in maximizing expected utility Rawls gives positive weight in social welfare to whoever will be the worst-off person and gives zero weight to everybody else Bentham rationally accounts for the likelihood that, after emerging from behind the veil of ignorance, an individual will not be the worst-off person 33
Hillman 2009 Social justice Chapter 7 Bentham’s lottery and Rawls’ certainty in life Bentham offers a lottery through incomplete insurance Rawls offers certainty in life after people emerge from behind the veil of ignorance and discover who they are We cannot compare levels of social welfare measured by the different Bentham and Rawls social welfare functions We can use a common utility function to compare personal utility 34
Hillman 2009 Social justice Chapter 7 The Bentham lottery U H for person 1 U L for person 2 U 1 The intermediate social welfare function 4 5 o gives a lottery with S outcomes at C 1 or C 2 F 1 and average utility at C B 1 The Bentham lottery C 1 U H for person 2 U L for person 1 B EU C U C A C 2 Rawls’ certain B 2 outcome in life F 2 at A if the Laffer curve allows O U 2 V U C EU Possible social insurance contracts when the Laffer curve does not restrain income redistribution The trade-off between ex-post equality and efficiency Choice of the social insurance contract through choice of a social welfare function is a choice between greater ex-post equality and greater efficiency 35
Hillman 2009 Social justice Chapter 7 A society may decide not to accept Bentham’s lottery and the associated ex-post inequality Political parties take positions on the trade-off between efficiency and ex-post equality – that is, on the spectrum between Bentham and Rawls 36
Hillman 2009 Social justice Chapter 7 A general representation for choice of social welfare functions between Bentham and Rawls: L L H H W p U p U Above the 45 o line, person U 1 1 has high utility and person 2 has low utility B 1 45 o Intermediate Below the 45 o line, person C 1 0 < <1 2 has high utility and B person 1 has low utility C A Rawls = 0 As decreases, U L C 2 after taxation and B 2 redistribution Bentham =1 increases U 2 O As decreases, U H after taxation and redistribution declines In the Rawls outcome at A, there is no difference between U H and U L after taxation and redistribution Social welfare functions obtained by varying 37
Hillman 2009 Social justice Chapter 7 Choosing a social welfare function with α <1 is a decision to subjectively increase the weight on experiencing a bad outcome and correspondingly a decision to discount subjectively the likelihood of experiencing a good outcome In the limiting case of Rawls where α = 0, the likelihood of a good outcome is altogether ignored 38
Hillman 2009 Social justice Chapter 7 W hy deviate from the objective probabilities of Bentham ? The reason for deviating from Bentham cannot be risk- aversion with respect to income because the utility function is the same in either case 39
Hillman 2009 Social justice Chapter 7 Prospect theory Daniel Kahneman and Amos Tversky (1937-1996) in 1979 defined “prospect theory”, from behavior in experiments People subjectively evaluate personal gains and losses from a specified reference point or status quo An implication of prospect theory is behavior that exhibits loss aversion People place larger than objectively justified weights on low-probability events that would bring large losses This results in < 1 Prospect theory was inferred by psychologists from observed human behavior 40
Hillman 2009 Social justice Chapter 7 Regret Departure from Bentham can be explained by the wish to avoid regret If the outcome is L , there is regret that Rawls was not chosen Choosing Rawls minimizes regret from experiencing an adverse outcome. Maximize “happiness” rather than utility from consumption or material wealth Regret affects happiness, including regret that Bentham was chosen 41
Hillman 2009 Social justice Chapter 7 How does a work ethic affect social insurance? There are no leaks in the bucket of redistribution, if all people have work ethic: When a work ethic is present, people work because of the intrinsic value of work and because of a feeling of disutility if they do not work In a society without a work ethic, the personal risk of experiencing an adverse outcome in Bentham’s lottery is balanced against the risk of having equal but perhaps no meaningful income under the complete insurance of Rawls 42
Hillman 2009 Social justice Chapter 7 A welfare state The objective of the welfare state is, in principle, complete insurance Why have voters in high-income welfare states persistently supported the high taxes and extensive income redistribution that approach Rawls-type social insurance? High personal incomes have been sustained: A work ethic has been present With a work ethic, unfortunate people attempt to be self-reliant but have been unlucky There is no resistance by taxpayers to paying high taxes to finance redistribution to people who have been unlucky 43
Hillman 2009 Social justice Chapter 7 The foundations for a work ethic Max Weber (1864-1920) studied how religion has influenced economic behavior The Protestant Ethic and the Spirit of Capitalism (1905) Bentham and a work ethic A Bentham social welfare function would call for extensive social insurance, if leaks in the bucket of redistribution are small Bentham and the rule of law Maximization of Bentham summation of utilities is restrained by the rule of law 44
Hillman 2009 Social justice Chapter 7 D. Adverse selection and tim e inconsistency After emerging from behind the veil of ignorance, people will know whether they have experienced H or L There is asymmetric information There is no uncertainty There is no demand for insurance Asymmetric information and adverse selection Adverse selection occurs when low-risk people leave an insurance pool 45
Hillman 2009 Social justice Chapter 7 Resolving the adverse-selection problem through different contracts Low risk people with good prospects in life want insurance only within a group of their own “type” A contract with a low insurance premium and low payout will be accepted by low-risk types A contract with a high insurance premium and high payout will be accepted by high-risk types The two types of individuals identify themselves through the type of insurance contract they choose Both types of persons gain from pooling risk in the separate insurance pools The asymmetric information problem is resolved and voluntary insurance is possible with no adverse selection 46
Hillman 2009 Social justice Chapter 7 Should the government offer separate insurance contracts? Compulsory social insurance is not insurance but systematic subsidization of high-risk people by low-risk people The case for enforcement by government of a single insurance pool is based on a time-inconsistency problem A time-inconsistency problem arises when optimal present decisions about future behavior are no longer optimal when the future arrives In enforcing compliance with the social insurance contract, governments respond to a time-inconsistency problem and avoid adverse selection 47
Hillman 2009 Social justice Chapter 7 7 .2 MORAL HAZARD So far only pure luck has determined personal outcomes through H and L We now recognize that personal outcomes depend on a person’s effort at self-reliance H and L become endogenous consequences of personal decisions Personal incentives to be self-reliant introduce moral hazard 48
Hillman 2009 Social justice Chapter 7 A. Moral hazard and insurance Moral hazard occurs when the presence of insurance affects personal decisions in ways that make payouts from insurance more likely The hazard is moral , because people exploit the presence of insurance 49
Hillman 2009 Social justice Chapter 7 Moral hazard and personal effort Moral hazard introduces personal effort as a personal decision variable high effort toavoid thebad outcome e H L low effort toavoid thebad outcome . e L L ( , ) ( , ) U y e U y e 1 1 H L 50
Hillman 2009 Social justice Chapter 7 Two types of effort decisions o Taxpayers reduce work effort in response to taxes by substituting leisure or free time for work: the leaky bucket of redistribution o There is no uncertainty when taxpayers make this effort decision: taxpayers know that they are taxpayers For prospective recipients of income transfers: o Effort decisions affect the likelihood being self-reliant o This decision about effort to be self-reliant is made under conditions of uncertainty about future personal income 51
Hillman 2009 Social justice Chapter 7 Voluntary insurance Voluntary insurance does not involve payment of taxes and so does not affect work effort of taxpayers The effect of voluntary insurance is on effort to be self-reliant through moral hazard Asymmetric information Moral hazard involves asymmetric information People have private information about whether they have chosen high or low effort to avoid adverse outcomes Others (including a private insurance company or the government) can observe an outcome y H or y L but cannot observe whether a person chose e H or e L 52
Hillman 2009 Social justice Chapter 7 Effort and luck Pr( | ) Pr( | ) 1, , e e i H L H i L i Pr( | ) Pr( | ) e e H H H L Pr( | ) Pr( | ) e e L L L H Whether a person has high or low income depends on both luck and effort Because of asymmetric information, whether low income is due solely to bad luck or also to low effort is not known to other people 53
Hillman 2009 Social justice Chapter 7 The prisoners’ dilemma and moral hazard in a voluntary insurance contract We consider income transfers made in accord with a voluntarily agreed contract There is no taxation and no excess burden of taxation Government is present only to provide the legal framework for the voluntary insurance contract 54
Hillman 2009 Social justice Chapter 7 With incomes shared through the insurance contract, personal outcomes for incomes are: o When both people choose high effort e H , the likelihood is maximized that, after income sharing, each person will have high income y H o When both people choose low effort e L , the likelihood is maximized that, after income sharing, each person will have low income y L o If one person chooses high effort e H and the other chooses low effort e L , the likelihood is maximized that the two people will share ( y H + y L ) and have y y H L y y y H A L 2 Although personal incomes are shared through insurance, the cost of exerting high effort is personal and is not shared 55
Hillman 2009 Social justice Chapter 7 The sharing of incomes and the personal cost of effort give rise to a prisoners’ dilemma The prisoners’ dilemma and moral hazard Person 2 chooses Person 2 chooses high low effort Effort Person 1 chooses 3,3 1,4 high effort Person 1 chooses 4,1 2,2 low effort In the Nash equilibrium with moral hazard, the likelihood is maximized that everyone will have low income People “free ride” by choosing low effort 56
Hillman 2009 Social justice Chapter 7 The common-pool problem (as in the tragedy of the commons) Earned income is a common pool When n people share a common pool of income: n y i a 1 i y n n y i y a 1 2 i y n n Person 1 keeps y 1 /n of own-earned income 57
Hillman 2009 Social justice Chapter 7 Self-deprivation and moral hazard The Nash equilibrium of prisoners’ dilemma has resulted in self-deprivation People choose to place themselves in personal circumstances where there is a high likelihood of personally earning low income 58
Hillman 2009 Social justice Chapter 7 Moral hazard and the failure of voluntary insurance With participation in an insurance contract voluntary, exit from the contract ends the common pool problem of pooling and sharing of incomes Without pooling of incomes, there is high EU from exerting personal effort because high income does not have to be shared Everyone is better off without the disincentives of the common pool problem of shared incomes and without moral hazard In terms of the tragedy of the commons, incomes are privatized Moral hazard results in the failure of voluntary insurance 59
Hillman 2009 Social justice Chapter 7 B. Behavior w ithout m oral hazard When is there no moral hazard problem? No random component of income o Effort alone determines personal income o Information about effort is no longer asymmetric o There is no role for insurance because there is no uncertainty about why income is low There is no asymmetric information and no moral-hazard problem if personal effort choices are observable o The insurance contract specifies the necessity of having been observed to have chosen high effort to receive payouts from insurance if there is low income 60
Hillman 2009 Social justice Chapter 7 How does a society maintain insurance in the face of the moral-hazard prisoners’ dilemma? Moral hazard and a work ethic A person who behaves according to a work ethic systematically chooses high effort to be reliant even though insurance is available when income is low There is no moral hazard and no prisoners’ dilemma when all people have a work ethic Everyone chooses high effort, notwithstanding the pooling of incomes through insurance 61
Hillman 2009 Social justice Chapter 7 C. Moral hazard and adverse selection in diverse populations What happens when populations are diverse and are composed of both people with a work ethic and people subject to moral hazard? Because of asymmetric information about choice of effort at self-reliance, unlucky people who exerted effort to be self-reliant are indistinguishable from people who did not attempt to be self-reliant People subject to moral hazard choose low effort to be self-reliant when insurance is available People with a work ethic choose high effort to be self- reliant whether or not there is insurance 62
Hillman 2009 Social justice Chapter 7 Two norms of behavior in a population Person 2 has no Person 2 has no work ethic and work ethic and chooses high chooses low effort effort Person 1 with a work ethic 4,3 3,4 chooses high effort Person 1 with a work ethic 1,1 2,2 chooses low effort The dominant strategy of person 1 with a work ethic is to choose high effort Person 2’s best response to person 1’s choice of high effort is to choose low effort The Nash equilibrium is at (3, 4) 63
Hillman 2009 Social justice Chapter 7 In a diverse population, people with a work ethic systematically subsidize people whose behavior is subject to moral hazard The objective of self-reliance of person 1 with a work ethic allows person 2 to maximize utility by choosing not to be self-reliant 64
Hillman 2009 Social justice Chapter 7 Sources of different norms regarding a work ethic A work ethic may be expressive and confirmation of self-identity o Some people feel uncomfortable or personally inadequate if they were to take advantage of insurance as a source of income A work ethic may also be due to stigma – family and peers may be able to observe a person’s effort decision Individual ability and human capital affect whether a work ethic is present o High human capital (or being educated) is the consequence of a work ethic, applied to studying Is the work ethic related to religion (Max Weber)? 65
Hillman 2009 Social justice Chapter 7 How do societies that begin with a work ethic come to have diverse social norms? (1) Change in norms from within The model of the family (2) Change in norms from outside There is adverse selection when people without a work ethic locate in a welfare state Local residents may view immigrants as victims of exogenous bad luck If sufficient immigrants do not integrate into self-reliant economic activity, the social insurance contract of the host welfare state may become unsustainable 66
Hillman 2009 Social justice Chapter 7 Why do the self-selected immigrants who choose location in a welfare state not have a work ethic? In immigrants’ home countries: Personal property rights were not protected (a Nietzschean society) There was a personal danger from having a work ethic (rulers feared that accumulated private wealth will be used to challenge their control) The ruler may distribute charity, to preempt or to quell unpopularity and unrest The western welfare state replaces the ruler 67
Hillman 2009 Social justice Chapter 7 Adverse selection through emigration Adverse selection occurs when taxpayers leave the welfare state Slavery and a work ethic A work ethic cannot be present under slavery Common property and a work ethic A work ethic is not rewarded when because private property and personal wealth cannot be accumulated Discrimination and a work ethic Adverse discrimination diminishes the motivation to look for work 68
Hillman 2009 Social justice Chapter 7 Presumption and incentives There may be a presumption that people do not have a work ethic because they have been observed not to be self-reliant – and because they are supported by income transfers from the government When the income transfers cease, people look for and find work and become self-reliant Changes in incentives bring us to public policy responses to moral hazard 69
Hillman 2009 Social justice Chapter 7 D. Public policy responses to m oral hazard Savings as voluntary self-insurance The optimal personal response to income uncertainty is not saving but risk pooling through voluntary insurance If adverse selection and moral hazard prevent voluntary insurance, saving as self-insurance is the sole voluntary means of protection against adverse personal future outcomes 70
Hillman 2009 Social justice Chapter 7 Objective verification: A third case of asymmetric information Moral hazard and adverse selection are two reasons why markets for voluntary insurance fail due to asymmetric information There is third source of asymmetric information that results in failure of voluntary insurance markets Voluntary insurance requires means of objective verification of outcomes against which insurance is sought 71
Hillman 2009 Social justice Chapter 7 The failure of voluntary insurance If the insurance contract and income pooling are voluntary, people with a work ethic can simply exit the insurance pool If all people with a work ethic leave the insurance pool, the people subject to moral hazard who behave strategically in choosing low effort have no one from whom to systematically receive income transfers The circumstances revert to the symmetric prisoners’ dilemma where the behavior of everyone in the insurance pool is subject to moral hazard Everybody then leaves the insurance pool because of moral hazard 72
Hillman 2009 Social justice Chapter 7 Voluntary insurance has failed, first because of adverse selection and then because of moral hazard If there is to be insurance, the insurance needs to be provided by government as compulsory social insurance from which people cannot exit 73
Hillman 2009 Social justice Chapter 7 Social insurance when there is moral hazard The moral-hazard problem is solved through incomplete insurance that makes earning high pre-tax income and being a taxpayer preferable to earning low income and receiving an income transfer The moral-hazard problem is solved if ( , ) Pr( | ) ( ) Pr( | ) ( ) EU y e e U y tax e U y incometransfer H H H H L H L ( , ) Pr( | ) ( ) Pr( | ) ( ). EU y e e U y tax e U y incometransfer L H L H L L L 74
Hillman 2009 Social justice Chapter 7 Solving the moral hazard problem also solves the adverse selection problem If incomplete insurance has made choosing high effort everyone’s best choice, no one has an incentive to leave the insurance pool With incomplete insurance providing incentives for everyone to choose high effort, any person observed to have low income has been genuinely unlucky and so is a victim of fate who deserves help 75
Hillman 2009 Social justice Chapter 7 Impediments to helping people who deserve help Incomplete insurance limits the assistance that is given to people who experience bad outcomes A society may want to help such people more, because they exerted high effort to be self-reliant but were unlucky If help could be given as a surprise after a person has experienced an adverse personal outcome, there would be no moral hazard There is a repeated game Moral hazard is re-introduced when people take advantage of asymmetric information to choose low effort in response to the high social insurance benefits – which are no longer a surprise 76
Hillman 2009 Social justice Chapter 7 The social dilemma of resolving the moral-hazard problem Non-generous income transfers of incomplete insurance eliminate moral hazard Because of the non-generous income transfers for people who experience bad outcomes, everyone chooses high effort However, some people nonetheless experience random unfortunate outcomes through no fault of their own High income transfers to the people who experienced the genuinely random unfortunate outcomes cannot be made without reintroducing moral hazard 77
Hillman 2009 Social justice Chapter 7 The two cases for incomplete insurance We now have two cases for incomplete social insurance (1) Behind a veil of ignorance where people have no information about their future selves (2) Moral hazard when, after emergence from behind the veil of ignorance, information is asymmetric , because people have private information about whether they have chosen high or low effort to be self reliant How incomplete should social insurance be, when the no- information and asymmetric-information cases for incomplete insurance are combined? 78
Hillman 2009 Social justice Chapter 7 Type-1 and type-2 errors and political sensitivities Incomplete insurance introduces two types of errors A type-1 error People in genuine need through no fault of their own are insufficiently helped by social insurance. A type-2 error People who could be self-reliant choose low effort at self-reliance and benefit from the income transfers of social insurance. 79
Hillman 2009 Social justice Chapter 7 Sensitivity to type-1 errors can expand insurance beyond Bentham’s incomplete insurance Sensitivity to type-2 errors can make choice of social insurance more incomplete than Bentham. o The left is less willing to make a type-1 error o The right may be less willing to make a type-2 error 80
Hillman 2009 Social justice Chapter 7 Disagreement over whether type-2 errors exist We have viewed luck and effort at self-reliance as separate influences on a person’s income. Could effort at self- reliance also be consequence of luck? Do people choose low effort at self-reliance or do they have no choice The left: o Through unequal opportunities in life, people with low incomes are victims of fate and unfairness The right: o Low incomes in the presence of insurance are the consequence of moral hazard. o Overly generous social insurance creates low incomes through moral hazard 81
Hillman 2009 Social justice Chapter 7 7 .3 SOCI AL JUSTI CE W I THOUT GOVERNMENT Can social justice be achieved without government? A. Altruism and charity Altruistic income transfers are voluntary There are no efficiency losses because of leaks in the bucket of redistribution Altruism and charity do not eliminate moral hazard 82
Hillman 2009 Social justice Chapter 7 Adam Smith on altruism Adam Smith in his book Theory of Moral Sentiments (1759) observed that human nature led people to be altruistically concerned about the well-being of others: However selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it, except the pleasure of seeing it 83
Hillman 2009 Social justice Chapter 7 Interdependent utilities Y y y 1 2 ( , ), ( , ) U U y y U U y y 1 1 1 2 2 2 2 1 U U 1 2 0, 0 y y 2 1 U 1 max U 1 4 5 0 B E A C max U 2 D U 2 O Interdependent utilities and Pareto-improving voluntary income transfers 84
Hillman 2009 Social justice Chapter 7 A three-person society ( , ), ( , ) U U y y U U y y 1 1 1 3 2 2 2 3 ( ) U U y 3 3 3 The income of the unfortunate person y 3 has the characteristics of a public good 85
Hillman 2009 Social justice Chapter 7 The prisoners’ dilemma of private income transfers when each person prefers that the other give Person 2 Person 2 does not gives give Person 1 gives 3,3 1,4 Person 1 does not 4,1 2,2 give 86
Hillman 2009 Social justice Chapter 7 Public policy because of the prisoners’ dilemma: taxation and publicly financed income transfers Asymmetric information: When preferences of donors differ, there is asymmetric information A government can only take a best guess about the taxes to levy on the two donors to finance an income transfer 87
Hillman 2009 Social justice Chapter 7 Expressive voting for voluntary redistribution Through expressive voting, people derive utility from confirmation of identity It may be sufficient to vote in favor of income transfers to obtain the benefit of utility from feeling generous 88
Hillman 2009 Social justice Chapter 7 A two-person example U(voting for transfers)=1 U(paying for transfers)=-2 U(if veto)=0 Person 2 votes Person 2 votes in against income favor of income transfers transfers Person 1 votes against income 0,0 0,1 transfers Person 1 votes in favor of income 1,0 -1, -1 transfers Nash equilibria in pure strategies are (1, 0) and (0, 1) Nash equilibrium in mixed strategies: 0.5 for either 89
Hillman 2009 Social justice Chapter 7 Sequential decisions The first person votes in favor The second person vetoes A person who can credibly commit to vote in favor of the incomes transfers gains from expressive voting Large numbers of voters Voters know that their vote will not be decisive under majority voting They take the positive utility that is available from voting expressively in favor of the income transfers The income transfers take place if a majority votes expressively (or genuinely) in favor Each voter would veto the income transfers if he or she could Expressive voting favors voluntary decisions by donors to provide income transfers 90
Hillman 2009 Social justice Chapter 7 Pleasure from giving Charity when the act of giving increases utility and highest utility is achieved by being the sole donor Person 2 Person 2 does not gives give Person 1 gives 8, 8 10, 5 Person 1 does not 5, 10 0, 0 give The dominant strategy is to give 91
Hillman 2009 Social justice Chapter 7 Charity when the act of giving increases utility and highest utility is obtained by giving together with others Person 2 Person 2 does gives not give Person 1 gives 10, 10 8, 5 Person 1 does 5, 8 0, 0 not give 92
Hillman 2009 Social justice Chapter 7 Exploitation of charitable intentions We have been considering interactions among donors We now consider the interaction between a donor and a beneficiary of income transfers who does not have a work ethic There is no moral hazard because there is no asymmetric information: the donor can observe whether the recipient is making an effort to be self-reliant 93
Hillman 2009 Social justice Chapter 7 The exploitation of charitable feelings The recipient The recipient (person 2) (person 2) does not exert exerts effort to effort to be be self-reliant self-reliant The donor (person 1) 2, 2 1, 1 does not give The donor 4, 3 3, 4 (person 1) gives The Nash equilibrium is (3, 4) The donor is unhappy with the outcome What can the donor do? 94
Hillman 2009 Social justice Chapter 7 Misrepresented preferences by the donor The recipient The recipient exerts effort does not to be self- exert effort to reliant be self-reliant The donor 2, 2 4, 1 does not give The donor 3, 3 1, 4 gives No dominant strategy for donor or the recipient and no Nash equilibrium in pure strategies The recipient does not want to die of starvation and recipient adopts a maxi-min strategy (makes the decision that results in the least potential self-harm) The outcome is at (3, 3) 95
Hillman 2009 Social justice Chapter 7 Based on the donor’s true preferences, this is the outcome that the donor wants Is the donor’s claim of willingness to allow the donor to starve to death credible? Rules and not discretion The role of a government bureaucracy that follows rules, not discretion 96
Hillman 2009 Social justice Chapter 7 Degrees of charity Maimonides (1135-1204) also known as the Rambam distinguished 8 levels of charity Social status Thorstein Veblen (1857-1929), in The Theory of the Leisure Class (1899), described conspicuous consumption Conspicuous giving to charity displays wealth The contest for status is similar to a rent-seeking contest: status is achieved relative to the status of others There is a prisoners’ dilemma similar to the rent- seeking prisoners’ dilemma The contest for status has social benefits when status is achieved by visible charitable activities 97
Hillman 2009 Social justice Chapter 7 Other questions Can the quest for social status also be an impediment to voluntary charitable transfers? Does public assistance decrease the incentive to give private charity? Are declarations of intent of charitable expressive? o The amount of private charity depends on how many people are prepared to actually give, rather than expressively declaring that “something should be done to help the needy” Does the behavior of the some beneficiaries of private charity affect overall willingness to give? o People are unwilling to give if they perceive moral hazard 98
Hillman 2009 Social justice Chapter 7 7 .3 B. Experim ental evidence on norm s of fairness The ultimatum game Outcomes of the ultimatum game indicate how conceptions of fairness influence behavior in a society In general, donors propose that they keep 60 percent and offer 40 percent to the recipient 99
Hillman 2009 Social justice Chapter 7 Outcomes of the ultimatum game in different locations USA Japan Israel Indonesia Amaz. tribe Ca Penn Arizo High Low na sum sum Numbers (pairs) 15 27 24 29 30 37 94 21 Value $160 $10 $10 $10 $10 $80- $10- $160 120 15 Mean 0.48 0.45 0.44 0.45 0.36 0.44 0.44 0.26 Mode 0.50 0.50 0.50 0.50 0.50 0.50 0.40 0.15 Rate of rejection 0.22 0.08 0.24 0.33 0.08 0.19 0.04 0 8 Rejected if >20% 9/15 1/10 2/4= 5/7= offered 0/0 0/1 - 0/0 = = 50% 71% 60% 10% Standards of fairness as near-equal division are universal An interpretation: people chosen to be donors should understand that luck could have gone the way We see the relation to the veil of ignorance 100
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