Bargaining and Coalition Formation Dr James Tremewan - - PowerPoint PPT Presentation

Bargaining and Coalition Formation

Dr James Tremewan (james.tremewan@univie.ac.at) Culture and Bargaining

Culture and Bargaining

Culture and Bargaining

• ”Bargaining and Market Behavior in Jerusalem, Ljubljana,

Pittsburch, and Tokyo”, Roth et al (1991).

• Classic paper for cross-cultural research. Discusses in depth and

develops methodology to deal with challenges in cross-cultural experiments.

• Compares behaviour in four cities in different countries (no

definition of ”culture” and number of countries too small to test for what elements of culture are important).

• ”Co-operation, Reciprocity and Punishment in Fifteen

Small-scale Societies”, Henrich et al (2001)

• Compares behaviour in 15 hunter-gatherer and nomadic

societies.

• Explains differences by economic structure of societies

(culture=economic/social institutions?).

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Culture and Bargaining

Culture and Bargaining

• Interlude: Measuring Culture. A systematic attempt to define

and measure culture, based on the work of Geert Hofstede.

• Uses ”factor analysis” of survey data to identify five

”dimensions” of culture.

• Nice because (pretty much) objective, widely used in economics

and other fields, and correlates with various macro variables etc.

• ”Cultural Differences in Ultimatum Game Experiments”,

Oosterbeek et al (2004)

• Meta-Analysis of 37 existing papers, with enough countries to

look at correlation between behaviour and measures of corruption (from Hofstede and WVS).

• ”An Economic Anatomy of Culture”, Chuah et al (2009)
• Only two countries but looks at cross-country differences in

behaviour and values, and how individual values effect individual behaviour to gain insight on which aspects of culture explain cross-country differences.

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Roth et al (1991)

Roth et al (1991)

• Ultimatum game played in four locations: Jerusalem, Ljubljana,

Pittsburgh, Tokyo:

• Subjects were all university students.
• 10 rounds of stranger-matching as either proposer or receiver.
• Anonymous, learn results of own negotiation after each round.
• Paid one random round.
• Challenges of cross-cultural experiments:
• Experimenter effects: uncontrolled procedural or personal

differences among experimenters.

• Language effects: differences caused by translations (even if

instructions in same language, some words may have different connotations).

• Currency effects: same numbers ⇒ different purchasing power,

same purchasing power ⇒ different numbers (scale, rounding).

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Roth et al (1991)

Experimenter Effects: Solutions

• Each experimenter ran at least one session in Pittsburgh:
• Enabled better coordination of operational procedures.
• Data could be used to test for experimenter vs between-country

effects: any experimenter effect should show up in Pittsburgh data as well as in cross-country data.

• Alternative: have the same experimenter present at all sessions

(e.g. Cameron et al, 2009). But may be language problems, or reaction to presence of foreigner.

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Roth et al (1991)

Translation Effects: Solutions

• Translations:
• The experimenter responsible is a national of ”other” country

and linguistically and culturally fluent in American English.

• Phrases chosen that could be faithfully translated (i.e. avoid

words with no equivalents, or heavy connotations).

• Control for translation differences:
• Also ran a market experiment using same vocabulary as

bargaining experiment.

• Claim: if between-country differences found in bargaining but

not in market game, this places ”upper bound” on effect of translation.

• Alternative: ”back translation” where second translator

independently translates the instructions back into original language which can be compared directly to original to identify important differences.

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Roth et al (1991)

Currency Effects: Solutions

• Purchasing power:
• Potential payoff in Pittsburgh sessions ranged form $10 to $30.
• In other countries payoff chosen to be on the high side of

purchasing power equivalent of $10.

• If results from other countries fall outside range of results in

Pittsburgh then strong evidence for other factors.

• Numerical issues: pie of size 1000 tokens in all countries

(different token/local currency exchange rates), with proposals limited to multiples of 5.

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Roth et al (1991)

Results: Proposer behaviour 1

• Modal offer in first round: 500 in all countries.
• Modal offer(s) in tenth round:
• 400 in Israel.
• 400 and 450 in Japan.
• 500 in Yugoslavia and United States.
• Downward trend in Israel and Japan, no significant trend in

Yugoslavia or US.

1I will not discuss statistical tests here. Some of the assumptions are a

bit dodgy, such as treating all observations in given round as independent despite stranger-matching (strictly speaking only first-round observations are independent).

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Roth et al (1991)

Results: Responder behaviour

• Overall proportion of rejected offers similar across countries

(large differences in final round, but large fluctuations and no

• bvious trend).
• Pairwise between-country comparisons of acceptance rates by
• ffer size (see next slide) suggests ”low-offer” countries (i.e.

Israel and Japan) have higher rates of acceptance for all offers.

• Modal offer in tenth round consistent with proposer maximising

expected earnings given responder behaviour.

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Roth et al (1991)

Results: Responder behaviour

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Roth et al (1991)

Discussion

• Bargaining behaviour in all countries differs markedly from SPE

prediction.

• Significant differences between countries in both proposer and

responder behaviour.

• Authors say differences not related to ”toughness” in bargaining:

in tougher bargaining one would expect lower offers, but higher rates of rejection.

• Differences appear to be related to responders’ differing ideas

about what is a ”reasonable offer.” In unfamiliar environment it takes time for proposers to identify what is socially acceptable.

• Criticisms:
• City or country differences?
• ”God-of-the-gaps” definition of culture: cross-country

differences that can’t currently be explained by other factors.

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Henrich et al (2001)

In Search of Homo Economicus: Behavioral Experiments in 15 Small-Scale Societies, Henrich et al (2001)

• Ultimatum game played in 15 (17) small-scale societies:
• Unlike previous studies, subjects NOT university students.
• Subjects play only one game in one role.
• Anonymous.
• Size of pie roughly equal to one or two day’s wages (mostly paid

in money, but sometimes tobacco or other goods).

• Controls for variations in implementation not so good as

previous paper for practical reasons (e.g. few Sangu herders are linguistically and culturally fluent in American English), but

• Experiments run from identical protocols.
• Stake sizes as similar as possible.
• Experimenter effects tested where possible (none found).

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Henrich et al (2001) 13/39

Henrich et al (2001)

Results: General observations

• No society behaves in line with SPE prediction:
• Lowest mean offer: 0.26; lowest modal offer: 0.15.
• Typically some non-zero offers rejected (interestingly there are

some groups which never rejected offers, but it is not clear that they would not have rejected smaller offers - need strategy method).

• Much wider variation in behaviour than in previous WEIRD2

studies:

• Means: 26-58% (cf. weird 40-50%).
• Modes: 15-50% (cf. weird 50% in first round).
• Rejection behaviour:
• Frequent rejections of offers over 50% (Au and Gnau).
• Zero rejection of low offers (Tsimane).
• Offers not income maximising given rejection probabilities (but

unlike Roth et al. no opportunity for learning).

2Western Educated Industrialized Rich Democracies, see Henrich,

Heine, and Norenzayan, 2010.

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Henrich et al (2001)

Results: Relationship between proposer behaviour and economic structure

• Payoff to Cooperation (PC): how important is cooperation in

economic production (low: Machiguenga who are economically independent at family level; high: Lamelara hunt whales in 12+ person canoes).

• Market integration (MI): how much do people rely on market

exchange in daily life.

• PC and MI measured using indices constructed by general

discussion in research team before data was gathered.

• Both PC and MI positively related to group mean offers (highly

significant), jointly explaining 68% of variation.

• Robust to inclusion of individual measures (sex, age, wealth...),

none of which were significant.

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Henrich et al (2001)

Discussion

• When faced with novel situation, subjects seek cues from

previous related experiences.

• Among Au and Gnau accepting gifts commits one to reciprocate

and establishes subordinate status, hence rejection of high offers.

• Sharing of results of hunt standard amongst Ache despite no

associated punishment, hence high offers and lack of rejections.

• Authors say their results suggest that preferences are not

exogenous, but shaped by social and economic interactions... questions calculation of welfare effects of policy changes that do not take this into account (e.g. introducing markets may reduce cooperative behaviour or result in less concern for others e.g. Armin Falk’s mice).

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Measuring Culture

Measuring Culture: Hofstede in a nutshell3

• Culture: ”The collective programming of the mind that

distinguishes the members of one group or category of people from another.”

• Culture is transmitted through generations by institutions such

as family, education, political, and economic systems; relatively stable over time.

• Cross-cultural studies make two assumptions:
• Cultures are different...
• ... but not so different that they cannot be compared.
• ”One cannot compare apples and oranges” but...
• ... they are both fruit which can be compared on a multitude of

dimensions such as price, weight, nutritional value...

• So what are the dimensions of culture?

3see for example ”Cultures Consequences,” Geert Hofstede.

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Measuring Culture

The IBM survey

• Between 1967 and 1973 116,000 questionnaires were completed

by IBM employees from 72 countries in 20 languages.

• Questions with correlated answers combined in such a way that

each group explains a significant amount of the overall variance and is statistically independent from the other groups. Partially based on theoretical considerations, partially achieved with country level ”factor analysis.”

• Initially four dimensions identified: Power Distance, Uncertainty

Avoidance, Individualism, Masculinity.

• Later work identified Long-term Orientation (initially missed

because of cultural bias in question selection in original survey), and more recently Indulgence-Restraint.

• Dimensions validated in other studies with different subject

pools; dimensions correlate with macro-variables such as GDP growth (LTO) and social spending (MAS).

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Measuring Culture

Power Distance

• ”The extent to which the less powerful members of organizations

and institutions accept and expect that power is distributed unevenly” (high PDI implies acceptance of unevenness).

• Index based on: ”How important is it to you to work with people

who cooperate well with one another?” and five other questions.

• High PDI associated with lower average years of education, more

political violence etc.

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Measuring Culture

Individualism-Collectivism

• ”The degree to which people in a society are integrated into

groups.”

• Index based on: ”How frequently, in your experience, does the

following problem occur: Employees being afraid to express disagreement with their managers?” and two other questions.

• Note: not to be confused with Masculinity-Femininity... people

in collectivist countries care about others in their group whereas people in feminine countries care about others in general.

• Individualist countries have lower piracy rates (Marron and Steel,

2007) and more patents per capita (Shane, 1992) etc.

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Oosterbeek et al (2004)

Cultural Differences in Ultimatum Game Experiments”, Oosterbeek et al (2004)

• Meta-analysis of 37 papers with 75 results from UG experiments.
• Tests some general results related to UGs.
• Looks at differences between regions.
• NEW: Tries to explain differences using cultural traits (e.g.

Hofstede’s dimensions). This is important to understand why behaviour is different in different countries, and to explain and predict behaviour.

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Oosterbeek et al (2004)

Methodology

• Searched for all experimental studies on the UG (this was a

major challenge in the old days before Google Scholar!)

• Eliminated sessions with ”non-standard” protocols, e.g. no

incentives, decisions made by groups.

• Extracted relevant data.
• Converted pie size to $US and divided by GDP/capita to roughly

adjust for PPP.

• Did not have raw data in many cases, so used only mean offer

and mean rejection rate (i.e. one study is one data point).

• Insufficient data points for some countries, so grouped by

region...

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Oosterbeek et al (2004)

Regional groupings

• Africa: Kenya, Tanzania, Zimbabwe.
• Asia: Indonesia, Japan, Mongolia, Papua New Guinea.
• Europe East: Romania, Slovakia, Yugoslavia.
• Europe West: Austria, France, Germany, Netherlands, Spain,

Sweden, United Kingdom.

• Israel.
• South America; Bolivia, Chile, Ecuador, Honduras, Paraguay,

Peru.

• US East.
• US West.

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Oosterbeek et al (2004)

Cultural Variables

• Hofstede’s dimensions:
• IDV: hypothesised to have negative effect on offers.
• PDI: hypothesised to have negative effect on rejection rates.
• Inglehart (2000) ”Respect for Authority”: more RfA
• hypothesised to have negative effect on offers.
• hypothesised to have negative effect on rejection rates.
• World Values Survey:
• % who agree that ”most people can be trusted” hypothesised

to have positive effect on offers.

• % who agree that ”competition is good” hypothesised to have

positive effect on offers.

• Throw it all into a big OLS regression, et voila...

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Oosterbeek et al (2004) 25/39

Oosterbeek et al (2004)

Results: Proposer behaviour

• General results:
• Pie size: effect statistically significant but small (moving from

lowest observed to highest (0.0035% - 17.6% of per capita GDP) decreases offered share by 6%).

• Inexperienced subjects offer more.
• Strategy method increases offer size.
• Cultural variables:
• High ”respect for authority” country proposers make lower
• ffers.
• Nothing else going on here.

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Oosterbeek et al (2004) 27/39

Oosterbeek et al (2004)

Results: Responder behaviour

• General results:
• Bigger offer and bigger pie size decrease rejection rates

(increase in pie by 48% has same effect as 1% increase in

• ffer... people care about fairness a lot).
• Strategy method increases rejection rates.
• Strategy method increases offer size.
• Cultural variables:
• Nothing significant.
• Note that this is conditional on offer share, so not inconsistent

with respect for authority decreasing offers.

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Oosterbeek et al (2004)

Regional groupings

• Africa: Kenya, Tanzania, Zimbabwe.
• Asia: Indonesia, Japan, Mongolia, Papua New Guinea.
• Europe East: Romania, Slovakia, Yugoslavia.
• Europe West: Austria, France, Germany, Netherlands, Spain,

Sweden, United Kingdom.

• Israel.
• South America; Bolivia, Chile, Ecuador, Honduras, Paraguay,

Peru.

• US East.
• US West.

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Oosterbeek et al (2004)

Discussion

• Evidence that greater respect for authority (a dimension of

culture frequently identified as important) reduces the size of

• ffers in the UG.
• None of the other cultural variables considered were found to be

related to proposer or responder behaviour, but:

• Small sample size (only 17 countries for Hofstede’s dimensions).
• Noise from uncontrolled for differences between experiments.
• In Roth et al, differences between countries emerged over

time... how to allow for this?

• A useful exercise given the expense of performing a single

cross-cultural experiment in enough countries to compare country level variables.

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Chuah et al (2009)

”An economic anatomy of culture”, Chuah et al (2009)

• Attempts to identify dimensions of culture associated with

behaviour in the UG, but requires only two countries.

• Experimental design:
• Subjects from UK and Malaysia play UG once as either proposer
• r responder, with someone from their own or other country.
• Subjects then complete the World Values Survey.
• Analysis:
• Cross-country differences in behaviour are identified.
• Factor analyses of WVS answers to identify different dimensions;

cross-country differences in dimensions are identified.

• Regressions at individual level identify which dimensions predict

behaviour.

• Claim: dimensions which differ between countries and predict

behaviour are responsible for cross-country differences in behaviour.

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Chuah et al (2009) 32/39

Chuah et al (2009) 33/39

Chuah et al (2009)

World Values Survey

• Factor analysis identifies 19 factor, 11 of which have significantly

different mean scores between the two countries

• 7 factors are significant determinants of behaviour, of which 4

differ between countries.

• Determinants of behaviour that differ:
• LEIS: importance of non-pecuniary aspects of job (e.g. good

hours, no pressure) - M>UK

• POST: ”postmaterialist” goals rather than materialist (e.g.

freedom of speech rather than high economic growth) - UK>M

• NREL: low score indicates religiosity - UK>M
• INDI: approval of homosexuality, abortion, divorce etc. - UK>M
• Determinants of behaviour that don’t differ:
• NCIV: Civic-mindedness (approval of tax evasion, corruption).
• NPAR: Participation in community groups.
• INSU: opposition to immigration, foreign goods.

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Chuah et al (2009)

Determinants of Individual Behaviour

• Age, gender, level of income, (relative) income, population of

hometown did not differ significantly between UK and Malaysian samples, and were not found to be significantly related to behaviour in either role.

• ”General-to-specific” technique
• Start with nationality dummy (=1 if M), the 19 cultural factors,

and interactions of nationality with factors.

• Step by step eliminate least significant variables until everything

is significant.

• Is this a good idea?
• Should leave in variables with strong theoretical justification

regardless of significance.

• Having interaction terms without the variables that make them

up is a bit dodgy.

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Chuah et al (2009) 36/39

Chuah et al (2009) 37/39

Chuah et al (2009)

Summary of results

• Nationality not significant after controlling for revelant cultural

factors.

• Having materialist, work-leisure values, and being non-religious

increased offers in both countries.

• Post-materialist values associated with pursuit of individual

rather than community goals.

• Work-leisure values may proxy for general interest in social

interaction.

• Evidence on effect of religiosity in previous studies is mixed: can

increase pro-social behaviour, but also prejudice and mistrust.

• Belief in individual freedom decreased offers in UK, but

increased offers in Malaysia.

• Civic-mindedness had no effect in UK, but increased offers in M.
• Participation in social organisations, positive attitudes towards

economic interactions with foreigners, and belief in individual freedom associated with lower rejection rates.

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Chuah et al (2009)

Discussion

• Nice methodology to identify which elements in culture are

important in behaviour (in this particular interaction - the UG).

• Problem: part of the point of identifying important cultural

dimensions was to explain in more detail differences in behaviour between countries and generalize... if dimensions have different effects indifferent countries we are not much further along.

• But some cultural variables do appear to have consistent effects

in at least these two countries. Further investigation required!

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