Living in Two Neighborhoods-Social Interaction Effects in the Laboratory

Article excerpt

I. INTRODUCTION

It is a long-standing and fundamental problem of the social sciences to understand whether and in what way humans are influenced by the behavior exhibited by the members of the social group to which they belong. We speak of a "social interaction effect" if an individual changes his or her behavior as a function of his or her respective group members' behavior. Social interaction effects are economically important because they may be present in many decision domains. (1)

From a theoretical viewpoint there are at least two potentially important sources for social interaction effects even in otherwise identical environments; both are studied in this paper. A social interaction effect can occur if the game that people play in their group has multiple equilibria which are because of the material payoff structure of the game. Behavior across groups can be different simply because different groups coordinate on different equilibria of the same game. A second and less straightforward source of social interaction effects concerns those interactions that operate via non-material psychological payoffs, such as conformism, social approval, fairness, reciprocity, or guilt aversion. These motives can induce players to adapt their behavior to that of others, even if the material payoff structure does not provide any incentive to do so.

The identification of social interaction effects requires several problems to be overcome (Akerlof 1997; Manski 1993, 2000): (1) identifying the reference group for which social interaction effects are sought to be established, (2) circumventing the problem of self-selection of group members by investigating randomly composed groups, (3) controlling correlated effects that affect all group members in a similar way, and (4)controlling contextual effects such as exogenous social background characteristics of group members. In this paper we present the design of an experiment that circumvents these problems and therefore allows us to study the behavioral logic of social interactions.

We argue that the experimental laboratory provides the researcher with a valuable tool to study social interactions because it guarantees more control than any other available data source (Falk and Heckman 2009). The ideal data set would observe the same individual at the same time in different groups or neighborhoods, which are identical--apart from different neighbors. Obviously, this is impossible in the field. In contrast, it is possible to come very close to this "counterfactual state" in the laboratory. In our experiment, we are able to observe decisions of the same subject at the same time in two economically identical environments. The only reason to behave differently in these two environments is the presence of social interactions, that is, the fact that a person is systematically and differentially affected by the behavior of his neighbors in the two environments. Our within-subjects two-group design circumvents the above-mentioned identification problems. Using the terminology of Manski (2000), in our study reference groups are well-defined; the setup avoids self-selection; subjects make simultaneous decisions in two economically identical environments, which controls for correlated effects, including experience; the decision problem is abstractly framed and decisions are taken anonymously, which avoids contextual effects. Moreover, our laboratory approach has the added advantage of eliminating measurement errors.

We investigate social interaction effects in two experimental games, which represent the two broad classes of strategic situations mentioned above--a coordination game that possesses multiple equilibria in material payoffs and a cooperation game which has only one equilibrium in material payoffs. The coordination game we study is a version of the "minimum-effort game" (Van Huyck, Battalio, and Beil 1990; see Camerer 2003, chapter 7; Devetag and Ortmann 2007 for overviews). …

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