Sunday, October 30, 2011
Perception of fairness (by Pedja dell'Arno)
Nicholas Stern, in his excellent presidential address to the European Economic Association in 2009, said that a big problem in global negotiations to stop or alleviate the consequences of climate change, was that developing countries should perceive as fair the offers by rich countries to reach an agreement. The idea is based on a very simple interaction called the Ultimatum Game, very well known by many social scientists. In this game, a proposer suggests a deal to some subordinate agent. The deal can be to split a given resource in a fair way (say, fifty-fifty) or to split it unequally (say, ten per cent versus ninety per cent). If the second agents accepts the deal, the resource gets splitted as suggested. Otherwise, the resource disappears (as would life in the planet if nothing is done to stop climate change). Given the alternative, the purely rational reaction of the second player should be to accept any deal. However, in practice, as seen in thousands of experiments, the second player almost never accepts utterly unfair proposals. The game has come to my mind after reading one after another article by many economists stressing the need for structural reforms, without saying much or anything about any suggestion to accompany them by a plan to make these proposals acceptable by those who may be the losers from such reforms, and may well be expecting some perceived fairness from the proposers.