Equity versus equality: Spectators, stakeholders and groups

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Equity versus equality: Spectators, stakeholders and groups James Konowa,b, , Tatsuyoshi Saijoc, Kenju Akaid ⁎

a

Chair of Economics and Ethics, Kiel University, Germany Department of Economics, Loyola Marymount University, One LMU Drive, Suite 4200, Los Angeles, CA 90045-2659, USA c Research Institute for Future Design, Kochi University of Technology, Japan d Center for Community-based Healthcare Research and Education, Shimane University, Japan b

AR TIC LE INFO

ABSTRACT

JEL classification: C91 D3 D63

Justice figures prominently in a wide variety of economically important contexts that involve both third parties and involved parties, e.g., in environmental regulation, international trade, and legal proceedings. The primary rivals for fairness rules over the distribution of a fixed good are equality and equity (i.e., allocations that are proportional to contributions). This paper reports the results of a dictator experiment in relation to a large variety of factors that might affect these rules, including performance on a real effort task, in-group identity, subject pools, allocative power, cultural orientation and demographic variables. We find impersonal third parties (i.e., Spectators) allocating anonymously for others favor equity. Subjects who share personal stakes anonymously with recipients (i.e., Stakeholders) allocate amounts between equity and equality. Stakeholders, who meet and communicate with their recipients (i.e., In-groups), allocate even more equally than anonymous stakeholders to their own recipients and behave more selfishly toward other subjects (i.e., Out-groups). These findings are robust with respect to subject pool, a measure of culture, and demographic variables, which seldom matter. We conclude that there is considerable agreement about these fairness rules, when parties are well informed, although there remain important differences across subject pools in the willingness to act on those rules.

PsycINFO: 3020 Keywords: Decision making for others In-groups Equity Equality Fairness Real effort task

1. Introduction People frequently employ fairness to justify their choices in a wide range of economically important contexts. This can be observed both among those with personal stakes as well as among third parties, whose decisions impact stakeholders. For example, polluters raise fairness concerns about environmental protection measures as do responsible oversight authorities, the latter both at the national (e.g., the US Environmental Protection Agency) and international levels (e.g., the Conference of Parties to the Paris Agreement). Fairness arguments are often invoked in discussions of international trade, which is impacted by the decisions and actions of the World Trade Organization’s Dispute Settlement Body as well as by those of its member states. Producers, consumers, and regulatory agencies often cite fairness with regard to industrial policies. In private civil cases, fairness is often referenced by adversaries as well as by judges and third party arbitrators, who adjudicate the conflicts. In cases such as these, some actions are chosen individually (e.g., a plaintiff’s claim against a defendant). Others are chosen by groups (e.g., an academic department vying for resources) and others by individuals acting within groups (e.g., a chair’s recommendation of pay raise for a colleague in a department).

⁎ Corresponding author at: Department of Economics, Loyola Marymount University, One LMU Drive, Suite 4200, Los Angeles, CA 90045-2659, USA. E-mail address: [email protected] (J. Konow).

https://doi.org/10.1016/j.joep.2019.05.001 Received 2 November 2018; Received in revised form 10 April 2019; Accepted 1 May 2019 0167-4870/ © 2019 Elsevier B.V. All rights reserved.

Please cite this article as: James Konow, Tatsuyoshi Saijo and Kenju Akai, Journal of Economic Psychology, https://doi.org/10.1016/j.joep.2019.05.001

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This paper reports the results of a novel dictator experiment that captures elements of these contexts. It examines how allocations follow different fairness rules and how the rules vary in relation to the stakes and positions of the parties (i.e., whether they are acting individually or within a group). Specifically, we distinguish impersonal third parties, or Spectators, who are individuals paid a fixed amount to allocate anonymously among recipients. Other subjects, who individually allocate a sum between themselves and an anonymous recipient, are called Stakeholders. In yet another case, subjects allocate within and across groups. First, two subjects meet and communicate to form an in-group. Some jointly make an Out-group decision: they allocate a shared sum between themselves and two other subjects, who remain anonymous and with whom they do not communicate. Then one member of each in-group makes an In-group decision, individually choosing how much to share with the other member of his or her in-group. Experimental and observational studies suggest that fairness is a multi-criterion construct, whereby the constituent principles have been conceptualized in a variety of ways. One rule is equality, which refers here to strict egalitarianism, that is, equal outcomes. Another rule is equity, which, keeping with common usage in most social sciences, refers here to the proportionality of rewards to contributions. Additional important forces have sometimes been called fairness1, but we focus here on these two rules for a number of reasons we now summarize. Equality and equity are the chief rivals for fairness rules within the empirical and theoretical literature on distributive justice. Equality has been the subject of much attention in experimental and behavioral economic research, e.g., Fehr and Schmidt (1999) and Bolton and Ockenfels (2000), and in broader policy discussions, e.g., Piketty (2014) and Stiglitz (2012). Equity has proven to be a significant motivating factor for behavior in both the laboratory, e.g., Cappelen, Moene, Sørensen, and Tungodden (2013), Faravelli (2007), Gächter and Riedl (2006), and Konow (2000), and in the field, e.g., Alesina and Angeletos (2005) and Fong (2001). Various studies also indicate the importance of trade-offs between these two rules, not only for distributive justice per se, but also for behavior affected by fairness, such as cooperation.2 In order to distinguish equity and equality, we must, of course, consider cases in which individual contributions differ: if they are equal, fair allocations even according to equity reduce to equal shares. Although cases like this are legion, there are often other challenges to identifying fairness due to contextual complexities, including inconsistent claims, imperfect information, or differences in the values of per unit contributions. Studies of these complexities demonstrate their importance and relevance to many types of economic decision-making.3 The purpose of this study, however, is to isolate the effects on fairness of certain other forces, including the presence or absence of stakes, stakeholder positions relative to others, and whether agents act individually or within groups. Thus, we employ a laboratory experiment, specifically a non-strategic design, that allows us to control factors that might otherwise confound inferences from observational data or from experimental games – factors such as strategic self-interest, reciprocity, and risk – while enabling the collection of data on numerous variables that can be related to a wide range of practical questions. A real effort task provides a basis for equity claims, and fixed stakes preclude a role for efficiency. Moreover, the technology is linear in contributions, the per unit values of contributions are the same across individuals, and subjects are fully informed about individual contributions in the main dictator decisions. The current study builds on these time-tested tools and adds important new features and original tests focused on equity versus equality. The Group treatment introduces a new dictator game with in-groups and out-groups. Previous research has established that anonymity affects in-group bias (e.g., Goette, Huffman, & Meier, 2012), but the In-group decision helps isolate in-group fairness preferences in a novel way involving face-to-face communication about an allocation decision. The Out-group decision allows us to extend previous work that has examined the effects of group decisions on subsequent individual ones (e.g., Luhan, Kocher, & Sutter, 2009) by specifically targeting possible effects on choices of equity or equality. The Spectator and Stakeholder treatments adopt many features found in Konow (2000), including its diverse US subject pool, and, therefore, offer an opportunity for replication. They also test the robustness of those results with a new Japanese subject pool, in the process doubling the sample size compared to the earlier study. In addition, methods of analysis, which have not been previously employed with this experimental design, are applied to all treatments. These methods are aimed at distinguishing equity from equality and at isolating these fairness preferences from other factors that might confound inferences about them, including self-serving choices of fairness rules and censoring of data. Overall, a rich and unique constellation of behavioral and self-report measures permit examination of a large set of factors that might affect the

1 Some of the most important alternative concepts include equality of opportunity (e.g., Roemer & Trannoy, 2016), reciprocity (e.g., Rabin, 1993), efficiency (e.g., in a multi-principle framework, see Charness & Rabin, 2002, and Engelmann & Strobel, 2004), and basic needs (Konow, 2010). 2 For example, Lange, Löschel, Vogt, and Ziegler (2010) report that agents actually involved in international climate change negotiations utilize multiple fairness rules, especially ones based on equality and proportionality. Among experimental studies, Reuben and Riedl (2013) find equity and equality to be the two most salient rules for establishing cooperation. Balafoutas, Kocher, Putterman, and Sutter (2013) conclude that allocations of group earnings are affected by fairness, including a version that distinguishes equity and equality according to luck vs. effort as per the “accountability principle” (Konow, 2000). 3 For example, disputes sometimes arise, when claims do not equal the total because of reduced surplus (Gächter and Riedl, 2005, 2006) or nonlinear production technology (Gantner, Horn, & Kerschbamer, 2016), when claims vary with information about contributions (Gantner & Kerschbamer, 2016; Karagözoglu & Riedl, 2015) or their salience (Fischbacher, Kairies-Schwarz, & Stefani, 2017), or even when technology is linear and information complete but there are arbitrary differences in the per unit values of contributions, e.g., Birkeland (2013), Cappelen et al. (2007), and Luhan et al. (2013). At the same time, many of these studies have also elicited spectator judgments and typically found less disagreement about equity and equality rules among spectators than stakeholders. Self-serving biases of stakeholders appear to play an important role in such disagreements, e.g., Rodriguez-Lara and Moreno-Garrido (2012). As a general point, note that lessons from simpler contexts might help to address problems in these more complex ones, e.g., in order to disentangle fairness from information effects and self-serving biases. This, in turn, could inform policy (e.g., about when and how spectators can help stakeholders establish norms, as in Schram & Charness, 2015).

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strength of fairness, in general, and the relative strength of equity or equality, in particular, including positions, group membership, power asymmetries, the size of stakes, demographic factors, nationality, and culture. Section 2 describes the experimental design, the procedures and the subject pool. Section 3 reports and analyses the results, which are striking in terms of what does and does not matter. Specifically, we find that spectators, who allocate rewards anonymously to others, follow a strict equity rule, whereas the allocations of anonymous stakeholders who share their earnings with others lie, on average, between equity and equality. Stakeholders in in-groups show a strong bias against out-groups and, within their in-groups, reduce this bias and shift further toward equal allocations compared to anonymous stakeholders. Having had previous allocative power does not significantly affect the fairness rule, but the size of stakes is positively related to equity. The findings about fairness rules are remarkably robust across cultural, national and demographic boundaries, although some subject pool differences emerge in the relative strength of fairness vs. self-interest. Section 4 concludes and discusses the findings. 2. Experimental design and procedures There are two main phases to the experiment: first, a production phase followed by an allocation phase. In the production phase of every session, twelve subjects in room X and twelve subjects in room Y perform a real effort task that generates earnings, specifically, they prepare letters for mailing. The time allotted for this is five minutes except in the third (Group) treatment, in which case it is six minutes: this adjustment keeps average hourly earnings similar across treatments, since the third treatment is about 20% more time consuming. The earnings generated by each subject are the product of the number of letters that subject completes and a constant credit per letter that is common to all subjects and treatments. Usually, subjects differ considerably in their performance on this task and, therefore, in the earnings that can be individually attributed to them. Subjects are then matched into pairs. This differs somewhat across treatments, but the standard protocol matches the most productive X subject with the least productive Y subject, the second most productive X subject with the second least productive Y subject, etc. This approach generates the maximum productivity difference within session, large variation in relative performance per pair, and similar total earnings per pair. We chose the letter preparation task with the aim of making the basis for equity clear to any subjects, who might have a preference for it. This task has proven unusually effective in this regard, both in the original Konow (2000) study and in subsequent ones, e.g., Carpenter, Matthews, and Schirm (2010) and Falk and Ichino (2006). Moreover, as we will see later, its efficacy is reaffirmed in the current experiment. This fact helps minimize non-preference-based reasons for equality. For example, equality can occur as a special case of a more general principle that otherwise generates inequality, as when the relevant contributions happen to be equal and the entitlement reduces to equal splits. But our matching protocol produces very few instances of actual equal productivity between members of a pair. Another common reason for equality is when information about relevant differences is either unavailable or unreliable, in which case preference-based rules are not salient and people favor equality by default (see Konow, 2003). Here, however, individual performance is common knowledge (save for one decision, where equity considerations are intentionally avoided for reasons explained shortly). The main treatment differences pertain to the subsequent procedures. Fig. 1 summarizes how allocation decisions vary by treatment. We begin with the first two treatments, which are modeled on two so-called “discretionary” treatments in Konow (2000). In the Spectator treatment, which is summarized in the top rubric, there are twelve spectators, or third party subjects, per session located in a third room, called Z, and each Z subject is matched with a single X/Y pair. Spectators are informed of the number of letters individually prepared by X and Y and are paid a fixed fee, unrelated to their allocation decisions, to distribute the joint earnings generated by their X and Y counterparts between them. The Stakeholder treatment in the second rubric of Fig. 1 is closer to the standard dictator game. Subjects in rooms X and Y first generate earnings and are matched into pairs as in the Spectator treatment, but there is no third party Z. Instead, X and Y are both informed of the performance of each, and X subjects are arbitrarily chosen to allocate individually the earnings generated by their pair between themselves and their Y counterparts. Thus, as summarized in the final column of Fig. 1, dictators make allocation decisions individually that, in turn, affect individuals with the only difference between treatments being that of a Spectator, whose dictator decision as a third party only affects others, versus a Stakeholder, whose dictator decision also affects him- or herself. Although some economic decisions are individual, many others have a group component. In this regard, social psychologists often distinguish “in-groups” from “out-groups.” For instance, in an academic department, faculty might develop a preferential regard for members of their own department, or “in-group,” over those of other departments, or their “out-groups.” This differential treatment and in-group cooperation might be instantiated in, or reinforced through, competition with other departments for college or university resources. At other times, however, the members of that same department might vie individually with other members of their in-group for departmental resources, e.g., for salary increases. In each of these processes, the power of individuals or groups to affect allocations is often asymmetric, e.g., as the result of personal relationships, strategic alliances or administrative assignments (e.g.,

Fig. 1. Allocation decisions. 3

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serving as departmental chair). The design of our third, or Group, treatment captures in simplified form features of decision-making in such contexts, when fairness considerations are involved. Building on the work in psychology on in-groups, economists have documented effects on incentivized behavior of experimentally constructed groups (e.g., Chen & Li, 2009, Eckel & Grossman, 2005, and Van Parys & Ash, 2018). In-group effects sometimes manifest even when constructed on such trivial bases as random assignment to anonymous color-coded groups, an example of the so-called “minimum group paradigm”. The two prominent approaches to explaining in-group favoritism in social psychology are “realistic conflict theory” and “social identity theory.” The former attributes the phenomenon to competition between groups for resources (e.g., Sherif, Harvery, Jack White, Hood, & Sherif, 1961). According to social identity theory, on the other hand, in-group bias results from a desire to feel positively about oneself, which is transferred to one’s group on the basis of some shared characteristics (e.g., Tajfel & Turner, 1979). In many situations, such as the above example of an academic department, in-group favoritism is potentially consistent with both approaches: academic departments compete with other departments, but individuals within a department might also feel more positively about members of their own academic unit. Our Group treatment relates to cases like this one in that we do not commit to, or seek to test, a particular theoretical explanation for in-group effects. Nevertheless, this treatment is closely related to the literature on social preferences and in-group effects. Two recent experimental studies are especially relevant, both of which study in-group bias in an identity theory framework through allocation decisions that have fairness and efficiency implications. Hett, Kröll, and Mechtel (2019) consider social identity as a choice and refer to a theoretical literature that assumes a preference to identify with more similar groups (social distance) as well as with groups with superior characteristics (social status). They find evidence of social identification preferences along both dimensions, which moderate distributive preferences. In a distribution experiment, Paetzel and Sausgruber (2018) find in-group bias is strong among members of high, but not low, status groups. Moreover, their results indicate less selfish treatment of in-groups than out-groups as well as an in-group preference for equal payoffs over efficient (and coincidentally unequal) ones. Goette et al. (2012) examine cooperation and punishment among real, as well as, minimum groups. They find that the strength of in-group effects on social preferences differs with various factors, such as the duration of interactions and the level of anonymity. In standard dictator games, even anonymous communication can affect transfers (e.g., Andreoni & Rao, 2011), although, by comparison, anonymity appears to affect dictator giving more reliably and strongly (Bohnet & Frey, 1999). The procedures for constituting in-groups in our study are, to our knowledge, unique. In-group members meet face-to-face and communicate with one another, whereas their relationship to out-groups is anonymous and without communication.4 Specifically, ingroup members discuss the distribution of joint earnings between themselves and members of their out-group. Since our experiment permits only brief interaction and in light of the evidence just cited about the importance of duration, anonymity, and communication, in-groups are constructed in comparatively strong terms. There is both the competition for resources from realistic conflict theory as well as various factors associated more closely with social identity theory that have been shown to reinforce in-group effects, including non-anonymity and communication. Our goal is not to identify the magnitude of in-group bias, or to test competing theories about it, or to disentangle the roles of different factors in producing it. Rather, it is to examine possible differences of ingroups about concepts of fairness, and this informs our design and analysis, including the choice of fixed stakes and the design of the Group treatment. Specifically, the Group treatment involves two allocation decisions, both of which are within-subject. In terms of Fig. 1, the first decision is represented in the Out-group row and the second decision in the In-group row. Fig. 2 shows the detailed sequence of steps of the experiment for all treatments, whereby those aspects unique to the Group treatment are italicized. The Group treatment begins with the same production phases as the other treatments (steps 1 and 2), but there are differences in the matching protocol and allocation decisions. Instead of pairs, subjects in step 3 are matched into quadruples consisting of two X subjects, called XA and XB who form Group X, and two Y subjects, called YA and YB who form Group Y, and the earnings of all four subjects are pooled. This is followed by two allocation decisions: steps 4 and 5 refer to decision 1, and steps 6 and 7 to decision 2. The experiment concludes with a questionnaire (step 8) and anonymous payment of subjects (step 9). We describe now the Group treatment in greater detail. In order to stimulate the formation of in-groups, matched A and B subjects are re-seated to meet face-to-face, informed of the total (but not individual) production and earnings of their quadruple, and free throughout this first stage to communicate with one another. This occurs separately in the two rooms: X groups never meet or communicate with Y groups. During this time, the XA and XB subjects make the first, Out-group, decision: they choose jointly how much to take for their in-group (Group X) and how much to give to the out-group (Group Y). Group Y subjects are informed how much the Group X has allocated to them. A and B subjects in both rooms then return to their original seats. Next, subjects in both rooms X and Y proceed to the second, In-group, decision. Subject XA (or YA, respectively) is arbitrarily chosen to allocate the Group X (or Y) earnings to him- or herself and to his or her XB (or YB) counterpart. Referring to Fig. 1, the Out-group decision resembles the Stakeholder decision, except for involving group, rather than individual, dictators and recipients. The In-group decision is more similar to the Stakeholder decision by being individual but differs by involving recipients, who are members of the dictator’s in-group. Note that the procedures in rooms X and Y are identical save one feature, viz., Groups X and Y differ in power in the Out-group decision, which might affect the In-group decisions of XA and YA subjects. This captures the aforementioned asymmetries in allocation power: this case of one-sided power removes strategic incentives and helps

4 There are several additional benefits of such in-groups, including greater external validity (interaction with socially proximate individuals is not usually anonymous or lacking communication) and the ability later to analyze possible effects of observing the gender or race of one’s in-group members.

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Fig. 2. Sequence of the experiment (procedures specific to Group treatment in italics).

isolate effects on the fairness of individual dictators with different historical power. We extend previous research on the effects of group dictator decisions on individual ones, e.g., Luhan et al. (2009), by considering the type of fairness affected, e.g., whether having been in an empowered group affects subsequent individual choices of equity or equality. Since the Group treatment involves pooling the earnings of quadruples rather than pairs, it requires distinct choices about the matching of subjects and provision of information, which we now describe. First, the matching mechanism in this treatment differs by decision. For In-groups, A and B subjects in each room are matched so as to maximize productivity differences, i.e., the most productive A with the least productive B, etc., analogous to the subject X and Y pairings in the other treatments. For Out-groups, X groups (each consisting of an XA and a XB) and Y groups (consisting of a YA and a YB) are assigned so that the most productive X group is matched with the most productive Y group, the second most productive X group with the second to most productive Y group, etc. This results in large average productivity differences between A and B subjects but small productivity differences between matched X groups and Y groups. Second, for the Out-group decision, Group X is told only the total production and earnings of their quadruple, but not the production or earnings of any individuals or groups. Remember that testing equity against equality requires different contributions, so this approach delivers a clear equity basis for the In-group decisions, where differences are large and known, but not for the Out-group decisions, where differences are small (often zero) and not announced. Appendix B discusses why this matching protocol is, in our view, best suited to the questions addressed here. Our experiment also permits analysis of, not only experimentally induced, but also naturally occurring variables. We can explore variation in fairness rules with the nationality of the subjects as well as with demographic data and cultural measures collected anonymously in the post-experimental questionnaire. A common view is that Japan is a more collectivist and egalitarian society than the US, e.g., Tachibanaki (2005). Others come to different conclusions, e.g., in their meta-analysis, Fischer and Smith (2003) find that equity and equality preferences are not significantly related to culture. Thus, we remain agnostic about whether the distributive decisions of our Japanese and US subjects will differ. Finally, large variation in the total stakes in the In-group decision facilitates analysis of the effect of stake size on equity and equality. A total of 432 subjects participated in this experiment: 144 in the Spectator treatment, 96 in the Stakeholder treatment and 192 in the Group treatment.5 For each treatment, equal numbers were drawn from the undergraduate campuses of universities in Los Angeles, USA and Osaka, Japan.6 The choice of samples reflects our aim to address the robustness of fairness rules in a non-trivial way beyond a US sample, while keeping other factors constant: both subject pools consist of college students, their universities are located in comparably sized metropolitan areas (the second largest in their countries) in economically developed nations with two of the three largest economies in the world that together represent over 30% of global economic activity. Subjects at both venues were invited by campus wide emails and flyers to sign up at designated websites. Participants were recruited from sundry disciplines and screened to exclude non-citizens. All sessions had twelve subjects per room. The Spectator treatment was conducted with three rooms (X, Y and Z), or 36 subjects total per session, whereas the Stakeholder and Group treatments each involved two rooms (X and Y), or 24 subjects total per session. In order to dispel doubts about the existence of counterparts in other rooms, all subjects initially showed up at a single location to register and receive their show up fees in US dollars ($5) or Japanese yen (¥750). They were then randomly assigned to separate rooms except for adjustments to balance gender and to break up obvious acquaintances. For practical reasons, subject choices were not blind to the experimenter. We cannot rule out this “single-blindness” affecting the results, although we have no strong prior beliefs about why or how this would affect the type of fairness preferences, indeed, Hoffman, McCabe, and Smith (1996) and Cox, Sadiraj, and Sadiraj (2008) report no significant differences between single- and double-blind procedures alone on dictator giving.

5 Given differences in the number of subjects needed per decision, these totals generate an equal number of Spectator, Stakeholder and Out-group decisions. 6 Numerous studies have addressed concerns that the behavior of undergraduate students might differ from that of a more general population, e.g., see Dürsch, Oechssler, and Vadovic (2012), Ball and Cech (1996) and the literature cited therein. Results vary, but the large majority of these studies finds either no significant differences or that the social preferences of both samples are qualitatively the same but that older populations act more strongly on social preferences. Since our focus is qualitative, these general findings raise no serious concerns about our use of a student sample for the purposes at hand.

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We now describe additional procedural details. Subjects are told that there are two phases and given more specific instructions for the first, production, phase. As in previous experiments of this kind (e.g., Konow, 2000, Cappelen et al., 2013), second stage procedures are described uniformly across treatments and only in general terms at this point. This is to avoid effects on first stage productivity of differences in knowledge about the exact pooling of earnings, subject matching and choice of dictators, which might later impact allocations and confound inferences about distributive motives.7 Each letter correctly prepared generates 100 points, which is also stated in local currency (viz., US$1 or ¥150 per letter). After the task is complete and the letters counted, the pooling of earnings for their treatment is explained, the dictators are identified for the first time (although merely as subjects X or Z), and dictators have five minutes to allocate points between subjects. Spectators are told they will be paid a fixed fee (US$10 or ¥1500) for their decision. For the Group treatment, X groups are first given five minutes to make the Out-group decision and to allocate the total earnings of the quadruple between themselves and the Y group.8 Then, the In-group allocations take place: the A subjects in each room have five minutes to allocate the group X (or Y) totals between themselves and B subjects. All subjects then complete a questionnaire, which includes demographic questions, questions about distributive preferences and the Singelis, Triandis, Bhawuk, and Gelfand (1995) self-report measure of culture (see Appendix C for further details). Finally, subjects are paid privately in cash and permitted to leave. Altogether, sessions lasted about 50 min except for the Group treatment, which lasted about 60 min. Average total earnings equaled $18.14 in the US and ¥2121 in Japan, roughly equal amounts in terms of purchasing power parity.9 The instructions were written in English, translated into Japanese and then back-translated by a separate translator into English to check for consistency. The first author was present at both locations to verify that the recruitment, procedures, and even physical set-up were equivalent. In order not to arouse suspicion, the experiment was conducted solely by Americans in the US and Japanese in Japan. The lead experimenter in the dictator rooms (except for YA decisions) was always the same person (Konow in the US and Akai in Japan). The experimental protocol is contained in Appendix C. 3. Results and analysis This section presents and analyzes the results with respect to the questions we have raised in the previous sections. 3.1. Summary statistics We consider first some summary statistics for the full samples for all four decisions in the experiment and reserve discussion of sub-samples (e.g., by location or XA and YA subjects) for the following sub-sections. Table 1 summarizes the mean allocations to X (or A, in the case of In-group dictators) as fractions of total earnings for the four decisions. The entitlement is the mean fraction of earnings produced by X or A, respectively. Below these are two-tail t-tests of differences between mean allocations and mean entitlements and between mean allocations and equal splits, respectively. We see that Spectator allocations do not, on average, differ significantly from either equity (i.e., the mean entitlement, using paired t-tests) or equality, that Stakeholder and Out-group allocations to themselves significantly exceed both entitlements and equality, and that In-groups take more than equal shares but not significantly more than their entitlements. The fact that Spectator allocations do not differ from equity or equality and that the decisions of stakeholding dictators are far below the self-interested shares of 1.0 suggests all groups are motivated by a fairness standard of some stripe. But the results also point to significant material self-interest for those having perso nal stakes, although less so in the case of In-groups. Indeed, the allocations of In-group members toward one another are the least selfish of any dictator decisions but their allocations to Out-groups are the most selfish. This is consistent with prior work on in-groups bias and is reassuring that the implementation was effective. Distinguishing the types of fairness at work, however, requires further analysis. Table 2 presents a simple but more disaggregated summary of the results. It categorizes each decision into one of three types, viz., proportional, equal or selfish, based on a calculation of whether it is closest in absolute terms from its respective entitlement, equality or giving X (or A in the In-group decision) the entire pie (ties are counted one-half to each type). The first column shows that 81% of Spectator decisions are closest to proportionality and 19% to equality (the selfish category is not applicable here, since these dictators are third parties). The percentage of proportional decisions falls to 57% and the percentage of equal ones rises to 30% for Stakeholders, whereas 13% are closest to the completely selfish allocation. Further gains in equality and losses in equity are apparent for In-groups, while selfish allocations fall somewhat. Regarding Out-group decisions, Table 1 reveals that Group X allocations to themselves significantly exceed both equality and equity, on average. Table 2 shows that 11% of allocations are closest, in absolute value terms, to taking the entire earnings whereas 83% are closer to equality and only 6% closest to proportionality (perhaps by chance). Collectively, these results suggest in-group favoritism, i.e., that X groups follow an equality rule while being drawn by self-interest to take greater than equal shares. Recall that 7 For example, subjects might adjust their effort based on knowing that they will be recipients or that they will be matched with low productivity types. This, in turn, could affect their views of fair allocations. For logistical reasons having to do with the facilities at one location, the experiment was partially computerized, but in the same manner for all sessions at both locations. Specifically, subjects completed forms by hand, but computers were used for all else, including matching, earnings calculations and generation of forms and receipts. For practical reasons, decisions were not blind to the experimenter, but the measures associated with pencil and paper forms presumably reinforced the anonymity of decisions to other subjects. 8 The X groups are told that, if at the end of the five minutes they fail to agree, one of the X subjects will be randomly chosen to decide, although it never came to that. 9 These earnings seemed sufficient: after receiving their payments, 99% of American subjects and 94% of Japanese subjects responded that they would be willing to participate in other economics experiments.

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Table 1 Summary of mean results. Spectator

Stakeholder

In-group

Out-group

Allocations Mean (Std. Err.)

0.45 (0.036)

0.57 (0.029)

0.54 (0.015)

0.59 (0.023)

Entitlements Mean (Std. Err.)

0.45 (0.033)

0.49 (0.028)

0.52 (0.019)

0.46 (0.006)

Difference mean allocation and mean entitlement t-statistic −0.02 p-value 0.985

2.95 0.005

1.29 0.200

5.72 < 0.001

Difference mean allocation and equality t-statistic −1.42 p-value 0.161 No. of obs. 48

2.31 0.025 48

3.06 0.002 91

4.04 < 0.001 48

Notes: The differences in means between allocations and entitlements employ paired t-tests. There are only 91 decisions by In-group dictators (48 XA and 43 YA subjects), because five of the 48 X Groups allocated nothing to their Y Groups leaving no decisions for the corresponding five YA subjects. Table 2 Type of allocation by decision (percentage of each type). Dictator Decision Allocation Type

Spectator

Stakeholder

In-group

Out-group

Proportional Equal Selfish

81 19 NA

57 30 13

45 49 6

6 83 11

Notes: These represent the percentage of allocations for each decision closest in absolute value to proportional, equal or selfish shares, respectively.

the procedures were designed to omit any basis for equity in this decision and to encourage equality by default. Indeed, the results of both OLS and Tobit regression analyses of Group X allocations on their entitlements suggests this was successful: entitlements are not significantly related to allocations (p = 0.67), and the adjusted R-squared is negative (see Table A1 in Appendix A). Given these results, the remaining analysis of equity and equality focuses on the three individual decisions, viz., those of Spectators, Stakeholders, and In-groups. The summary statistics in this section are suggestive but too crude to support any strong inferences about rules of fairness, so we turn to regression analysis in the following sub-sections. But the general impressions from Tables 1 and 2 about the comparative strength of self-interest and the shifting of fairness rules across decisions are broadly in line with subsequent analysis. 3.2. Regression analysis Fig. 3 presents the allocations and entitlements for the individual decisions in the three treatments of this experiment. Fig. 3a shows the dictator choices of Z subjects in the Spectator treatment. The horizontal axis represents the fraction of letters produced by the X subject and the vertical axis the fraction of earnings allocated to the same X subject by the Spectator. If spectators value equality, the allocations should lie along a horizontal line at 0.5 (this line is omitted to avoid clutter). Equity, on the other hand, calls

Fig. 3. Dictator allocations. 7

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Table 3 OLS regressions for individual decisions.

Intercept Entitlement F-statistics Equity (a = 0, b = 1) Equality (a = 0.5, b = 0) Adjusted R2 No. of obs.

Spectator

Stakeholder

In-group

0.05 (0.043) 0.90*** (0.086)

0.26*** (0.067) 0.63*** (0.128)

0.30*** (0.037) 0.46*** (0.067)

0.73 57.84*** 0.70 48

9.26*** 16.16*** 0.33 48

33.27*** 31.12*** 0.34 91

Notes: Standard errors are in parentheses. *p < 0.1, **p < 0.05, ***p < 0.01.

for proportionality: fair allocations correspond to the entitlement and lie along the lighter 45 degree line where fractional allocations equal fractional contributions (disregard the dark lines for now). Apart from a few outliers, most Spectator decisions are quite close to or on the 45 degree line. Fig. 3b presents the results of the Stakeholder treatment. The points refer again to X subjects, but the fractional earnings on the vertical axis here are those chosen by the X subjects to themselves. As with Spectators, a number of these allocations equal the entitlement, but departures from this line are more prominent. The In-group decisions in Fig. 3c illustrate the dictator allocations of A subjects in rooms X and Y to themselves, which reveal a higher incidence of equality than the other decisions. These impressions are reinforced and further illuminated by regression analysis. The dark lines in Fig. 3 result from the following OLS regression of fractional allocations on fractional entitlements for each of these three decisions:

Allocationi = a + b·Entitlement i +

(1)

i

Table 3 reports these regression results as well as the results of F-tests of the joint hypotheses for the equity and equality cases. Specifically, equality corresponds to an intercept of one-half (a = 0.5) and a slope of zero (b = 0), whereas equity involves an intercept of zero (a = 0) and a slope of one (b = 1). For the Spectator decisions, there is strong support for equity and no significant support for equality, confirming the impressions from Table 2 and Fig. 3. Allocations in the two other decisions, however, fall between, and differ significantly from, equity and equality. The highly significant slope coefficients in all three regressions demonstrate that the entitlement, and therefore equity, matters in every condition, although to differing degrees. In particular, on average, Spectators allocate according to equity, whereas Stakeholders and In-groups equalize more and respond less to differences in entitlements than Spectators. We consider now the robustness of these findings with respect to different estimation techniques and subject pools. First, the OLS regressions in Table 3 offer the advantage of easily interpreted coefficients, but note that the contraints on the dictator’s transfer might cause these to overestimate the importance of equality. Specifically, suppose the fairness preferences of a dictator are based solely on equity, but some other factor draws allocations away from strict proportionality. This dictator is more likely to encounter corner solutions near extreme entitlements at zero and/or the entire stakes and, therefore, to transfer more equal amounts, either all or nothing, in these ranges. This applies to Stakeholders, who trade off self-interest with sufficiently high entitlements, but it also includes Spectators, who allocate with error at both extremes. Given the fact that the dependent variable in these regressions is leftand right-censored, we report the results of two-sided Tobit regressions in Table 4. These lead to the same conclusions as OLS with respect to the relative importance of equity and equality in the three decisions. Spectators allocate equitably, whereas, by comparison, dictators equalize more as Stakeholders (t-statistic = −2.12, p < 0.04) and even more as In-groups (t-statistic = −3.97, p < 0.01). Joint tests of the hypothesis of no change in intercepts and slopes similarly indicate significant differences between Spectator allocations and those of Stakeholders (F-statistic = 7.08, p < 0.01) and In-groups (F-statistic = 9.64, p < 0.01). In the remainder of this paper, we will report two-sided Tobit regressions, except where it is helpful to present easily interpreted effect sizes with OLS. Nevertheless, the conclusions are qualitatively the same with either method. Table 4 Tobit regressions for individual decisions.

Intercept Entitlement F-statistics Equity (a = 0, b = 1) Equality (a = 0.5, b = 0) No. of obs.

Spectator

Stakeholder

In-group

0.01 (0.049) 0.96*** (0.097)

0.24*** (0.072) 0.67*** (0.138)

0.30*** (0.037) 0.47*** (0.067)

0.11 52.39*** 48

7.61*** 15.67*** 48

33.16*** 31.40*** 91

Notes: Standard errors are in parentheses. *p < 0.1, **p < 0.05, ***p < 0.01. 8

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Table 5 Tobit regressions for individual decisions by sample.

Intercept Entitlement JP JP × Entitlement ES ES × Entitlement F-statistics H0: c = d = 0 H0: e = f = 0 Adjusted R2 No. of obs.

Spectator

Stakeholder

In-group

0.01 (0.049) 1.02*** (0.110) 0.04 (0.181) −0.14 (0.097) 0.04 (0.125) −0.10 (0.254)

0.22 (0.134) 0.75*** (0.275) −0.06 (0.163) 0.04 (0.321) 0.34 (0.216) −0.51 (0.410)

0.33*** (0.059) 0.43*** (0.110) −0.06 (0.075) 0.06 (0.137)

0.21 0.01 0.68 72

0.33 1.68 0.31 72

1.16 0.34 91

Notes: Standard errors are in parentheses. JP = dummy variable for Japanese subjects, ES = dummy variable for subjects from similar Konow (2000) treatments. Adjusted R2 is from OLS. *p < 0.1, **p < 0.05, ***p < 0.01.

Consider now the robustness of these findings across different samples. As previously explained, all treatments were conducted with US and Japanese subjects, and, in addition, the Spectator and Stakeholder decisions employed similar experimental procedures as two Konow (2000) treatments. We test for differences in equity and equality rules across these samples. In general, to test for differences in the equity-equality trade-off in relation to some “Variable,” we define a corresponding dummy variable and estimate the following regression:

Allocationi = a + b·Entitlement i + c·Variablei + d·Entitlement i·Variablei +

i

(2)

If, for example, equity is positively related to the Variable, the coefficient c should be negative and the coefficient d positive: as the Variable increases, proportionality counts more and equality less so that the intercept falls and the slope rises. In the current case, we define dummy variables for the Japanese sample (JP) for use in all regressions, and the earlier Konow (2000) study (ES) for use in the Spectator and Stakeholder regressions. Table 5 presents the results of two-sided Tobit regressions of allocations on entitlements and these dummies. The intercepts and slopes in the Japanese sample (c and d, respectively) and in the earlier study (e and f, respectively) do not differ significantly from the current US sample, according to F-tests. Since the US and Japanese samples do not usually differ significantly in the current study, we will continue to merge these samples, noting important exceptional cases. The combined results of Tables 3–5 are reassuring with respect to the conclusions we have drawn thus far. Spectators allocate proportionately, which confirms subject acceptance of the experimental task as a basis for equity. And the consistent relative effect sizes across the decisions lends confidence to inferences about the dependence of fairness rules on the presence of stakes and allocator positions (i.e., whether they are acting individually or within a group). In the introduction, we argued that such variation in behavior is important per se in many economic contexts. In the remaining analysis, we bore deeper and additionally attempt to ascertain whether we may say more about the causes and correlates of these rules. For example, can these rules be explained by self-serving biases rather than preference-based shifts, differences in experienced power, the size of the stakes involved, cultural orientation, and demographic variables? Above we mentioned one potential obstacle to concluding that the observed shifts in equity versus equality across decisions are based on the response of fairness preferences to changing rules, namely, the equalizing effect of censored allocations. This was addressed through our estimation technique, but another potentially equalizing force concerns the possible self-serving use of fairness rules. This is specific to stakeholders, who might act in a self-serving manner and choose the fairness rule that maximizes their payoff. That is, they might choose equality, when their contributions are low, and equity, when their contributions are high. Some studies have found evidence consistent with this interpretation, e.g., Luhan, Poulsen, and Roos (2013) and Rodriguez-Lara and MorenoGarrido (2012), whereas other studies come to different conclusions, e.g., Cappelen, Hole, Sørensen, and Tungodden (2007) and Gächter and Riedl (2005). To determine whether such self-serving behavior plays a role with this experiment, we carried out additional tests. If stakeholders choose fairness rules in a self-serving manner, then they should choose equality, when their entitlement is less than 50%, and equity, when it is greater than 50%. We created a dummy variable, High, that equals one, when a dictator’s entitlement is strictly greater than 0.5 and zero otherwise, and included it in the following regression:

Allocationi = a + b·Entitlement i + c·Highi ·Entitlement i +

(3)

i

According to the strong version of this claim, it should be the case that a = 0.5, b = 0, and c = 1. A weaker claim is only that c is significantly greater than zero, e.g., because allocations also reflect further self-interest that exceed these rules and/or because there is a mixture of dictator types only some of whom choose fairness rules in a self-serving way. Table 6 reports the results of regressions 9

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Table 6 OLS regressions with high dummy.

Intercept Entitlement High × Entitlement Adjusted R2 No. of obs.

Stakeholder

In-group

0.16* (−0.086) 0.96*** (0.225) −0.22* (0.127) 0.36 48

0.35*** (0.047) 0.32*** (0.111) 0.09 (0.058) 0.35 91

Notes: Standard errors are in parentheses. *p < 0.1, **p < 0.05, ***p < 0.01.

for our two individual stakeholder decisions, Stakeholder and In-group. It presents the OLS results for ease of comparison with Table 3, but the Tobit regression results are similar. The entitlement continues to be highly significant and now somewhat larger for Stakeholders and smaller for In-groups, but the interaction terms with High are not significant. Indeed, the sign of the interaction term in the Stakeholder regression would imply that more productive Stakeholders are, if anything, less insistent on equity, but this effect misses significance (p = 0.09). The sign of the interaction in the In-group regression is consistent with self-serving choices but is small and insignificant. We are unaware of any conclusive evidence on why self-serving choices are a significant factor in some studies and not in others. One conjecture is that this is related to the experimental task, design and procedures, which differed among the studies cited above. Moreover, self-serving behavior can manifest in different ways, which might also be sensitive to such experimental features. For example, self-serving behavior was also found in the Konow (2000) study, which employed the same task as here, but there it was traced to self-serving beliefs about a single rule (apparently related to differences in per unit credits) rather than to self-serving choices of fairness rules. Now we turn our focus to the Group treatment, which provides distinct insights into the causes and correlates of fairness rules.10 One question is that of power, i.e., of whether membership in the less powerful Group Y has a subsequent effect on how In-group dictators (XA and YA) allocate. One conjecture is that those, who have been denied power, will treat others more equally, i.e., that YA subjects will allocate more equally to YB subjects than XA subjects do to XB subjects. Another question is whether the size of the stakes affects the choice of fairness rules. One view (e.g., Güth, 1988) is that proportionality is the basic rule of distributive justice but that people often follow equality, when stakes are small. This seems consistent with many social practices, e.g., friends and colleagues often “split the tab” in restaurants, when the bill is comparatively small, to avoid various costs, including of goodwill, but agree to a more exact reckoning, when the stakes are higher. We test stake size effects with the In-group decision for two reasons. First, only this decision fits the personalized stories, Second, with stakes ranging from 0 to 6300 points (equivalent to $63), the In-group decision is the only one in this experiment with sufficiently disperse stakes to test its effect meaningfully.11 To disentangle these potentially interrelated questions, we ran regressions with a dummy variable, Group Y, which equals one for YA subjects, and Stakes, which equals the normalized points available to each A/B pair, and interacted each of these with the entitlement. A shift toward equity with the stake size implies the coefficient on the Stakes dummy (c) is negative and its interaction (d) is positive, whereas a shift toward equality by YA subjects implies the coefficient on the Group Y dummy (e) is positive and its interaction (f) is negative. Table 7 reports the results of these Tobit regressions. Based both on the coefficient estimates and F-tests, we find significant confirmation of an effect for stake size but not for membership in Group Y. Thus, controlling for stake size, the previous experience of having exercised power has no significant effect on the fairness rule. But larger stakes are associated with significantly more proportional allocations, or, put differently, dictators allocate more equally with smaller stakes. Indeed, OLS and Tobit regressions for this decision provide the strongest evidence thus far of equality: as the stakes approach zero, allocations approach equality: based coefficient estimates and an F-test, the intercept (a) does not differ significantly from 0.5 and the slope coefficient on the Entitlement (b) does not differ significantly from 0. The post-experimental questionnaire included a number of subjective and objective questions, which rarely yield significant results. Regression analysis finds that none of five questions about general distributive preferences is significantly related to allocations, although the entitlement remains highly significant and nearly identical in magnitude in all three individual decisions (see Table A2 in Appendix A).12 We also included the aforementioned Singelis et al. (or STBG) self-report measure of culture. Tobit

10 Note that Table 1 revealed that group (Out-group) allocations are generally more selfish than individual (In-group) ones, consistent with most previous work on this question, e.g., Luhan et al. (2009). Nevertheless, this comparison must be taken with a grain of salt in the current study, since it is likely due at least in part to the additional fact here that the individual decisions are non-anonymous. 11 Specifically, we created a Stakes variable separately for each decision: the total points available for each decision are normalized so that the mean points for that decision equal 1. The (normalized) standard deviations equal 0.257 for Spectators, 0.229 for Stakeholders, 0.040 for Outgroups, and 0.505 for In-groups. Thus, the standard deviation in In-group Stakes is about two to twelve times that of the other decisions, and the Ingroup decision is the only one for which Stakes prove significant in regressions. 12 Specifically, the questions elicit agreement on a four point Likert scale with statements about subject control over performance on the experimental task, basic needs, guaranteed income, and whether efficiency is promoted by minimizing differences in pay (equality) or by paying according to productivity (equity).

10

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Table 7 Tobit regression analysis of effect of stakes and group Y on in-group allocations. Variable

Parameter estimate (Std. Err.)

Intercept

0.47*** (0.105) 0.02 (0.180) −0.26** (0.115) 0.60*** (0.201) 0.11 (0.070) −0.16 (0.127)

Entitlement Stakes Stakes × Entitlement Group Y Group Y × Entitlement F-statistics: H0: a = 0.5, b = 0 H0: c = d = 0 H0: e = f = 0 Adjusted R2 Number of observations

0.23 6.81*** 1.46 0.42 91

Notes: Standard errors are in parentheses. Adjusted R2 is from OLS. *p < 0.1, **p < 0.05, ***p < 0.01.

regressions of allocations on the entitlement and the four STBG scales controlling for demographic variables are reported on Table A3 of Appendix A. They reveal no significant effects of any of the scales on the allocations of Spectators, Stakeholders or In-groups, while the entitlement maintains high significance and almost the same effect sizes as the regression estimates without these controls.13 Nevertheless, such measures are notoriously unreliable, and, in this case, validity is also in question: the mean scores on these scales for the US and Japan are reversed from the predictions of STBG for these countries, as summarized in Table A4 of Appendix A. Regarding demographic characteristics, we added the following regressors to regressions of allocations on entitlements: age, student expenditures during the school year, student earnings, parents’ annual income (in seven discrete categories), work hours per week, a gender dummy, and dummy variables for Asian, black, Latino and Middle Eastern.14 We ran separate Tobit regressions for Spectator, Stakeholder and In-group decisions, the results of which are reported in Table A5 of Appendix A. The entitlement continues to be positive and highly significant in every case, but almost nothing else is significant: age, parents’ income, work hours and race are never significant. The one finding out of the 27 demographic coefficients that is significant at the 5% level has a plausible explanation: student expenditures are significant in the Stakeholder decision, where expenditures are directly related to the fraction taken. This seems reasonable: “big spenders” take more for themselves when they are able to so do (i.e., have personal stakes) and can do so with impunity due to anonymity. Given its non-anonymity, the In-group decision offers the opportunity to explore whether dictators allocate differently based not just on their own race but also on that of their recipients.15 We conducted two Tobit regression analyses of race, the results of which are presented on Table A6 in Appendix A. The one defines dictator/recipients pairings based on membership in the dictator’s group (Asian/Asian, Asian/non-Asian, etc.), and the other defines pairings based on the race of the recipient (e.g., Asian/Asian, non-Asian/ Asian, etc.). The entitlement remains highly significant, but none of the race dummy variables is significant in these regressions. The In-group decision also offers similar opportunities to examine gender effects. On average, men take 55% of the pie and women 54%, roughly equal shares. But both groups take somewhat more for themselves when matched with men (56% for both male and female dictators) than when matched with women (53% for male dictators and 51% for female dictators). Controlling for entitlements, though, gender is not significant in the pooled sample (Table A7 in Appendix C). So far, we have found no systematic differences between the US and Japanese samples with respect to fairness rules or various possible causes and correlates of those rules. There are indications, however, that stakeholding subjects in the two samples differ with regard to their willingness to sacrifice material rewards for fairness. Stakeholders in the US take, on average, 10 percentage points more than their entitlements (t-statistic = 3.00, p < 0.01), whereas those in Japan take only 5 percentage points more (t13 Additional regressions explore effects on the choice of equity versus equality by adding interaction terms of the scales with the entitlement. These similarly reveal no significant effects of the scales, although introducing so many interaction terms produces multicollinearity that compromises the usefulness of such tests. 14 The questionnaire includes three variables that are not analyzed here, viz., college (e.g., Business, Liberal Arts) and major, since these are not comparable across institutions, as well as year in college due to the high correlation with age. In a meta-analysis of dictator games, Engel (2011) reports that giving and age are significantly positively correlated, so we include it in our analysis for good measure, although an age effect seems unlikely here given the age range in our dataset is much more narrow than in Engel’s. 15 Since the Japanese subjects were all Asian, the racially diverse pairings in the following analysis were entirely in the US sample. All of the following findings hold, though, for the pooled US/Japan sample.

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statistic = 1.29, p = 0.21). US In-groups take 4 percentage points more than their entitlements (t-statistic = 1.78, p = 0.08), whereas this difference is zero in Japan (t-statistic = 0.00, p = 0.99). Taking equality as the fair share in the Out-group decision, we find that US Out-groups take 14 percentage points more than an equal share (t-statistic = 3.93, p < 0.01), whereas Japanese ones take only 4 percentage points more (t-statistic = 1.72, p = 0.10). National differences in self-interest also offer explanations for the other, isolated cases of significant differences between the US and Japanese samples that we do find. One example involves the effect of Group X allocations on the subsequent XA allocations. Regressions of XA allocations on their entitlements and their previous Group X allocation to themselves show that Group X selfishness significantly increases subsequent individual selfishness but only in the US. The other example is one significant gender effect with Ingroup allocations: women are significantly more generous toward other women, consistent with the findings of Dufwenberg and Muren (2006), but only in the US.16 One conjecture about why these two effects are significant in the US but not Japan is that they all involve In-groups, who in Japan are, on average, already allocating the fair amount. Thus, in contrast to their more selfish US counterparts, the average Japanese In-group subject has no room to be even fairer to other In-group members, in the first example, or to women, in the second example. 4. Discussion and conclusions This paper reports the results of an experiment that examines a wide variety of factors that might affect whether a fairness rule of equity or equality is applied in the distribution of a fixed resource. It introduces new decisions and applies new tests to zero in on the rules and their application under different conditions. We find that Spectators, or impartial third parties, follow equity, allocating rewards in proportion to contributions, whereas the allocations of Stakeholders, whose own rewards are involved, lie between equality and equity. Individuals, who meet and talk, form an In-group, which exhibits a strong bias against an Out-group, with whom they do not share this familiarity. Indeed, their allocations to Out-groups show the largest self-interested bias of any allocation decisions in this experiment. Individual allocations to other members of one’s In-group, on the other hand, show the smallest selfinterested bias of any stakeholder decisions and also equalize the most of any allocation decisions examined here, while still varying significantly with individual contributions. These results prove remarkably robust with respect to a large number of factors, such as nationality, power, self-reported distributive preferences, culture, and demographic variables. In-groups equalize at very small stakes but allocate proportionately as the stakes increase. Further analysis shows that these patterns are not due to censoring of allocations or self-serving choices of rules. Thus, the results suggest that the observed patterns of variation in equity and equality rules are due to preference-based responses to shifting fairness rules. One difference suggested across all decisions is a lesser willingness to make material sacrifices for fairness among the US than Japanese subjects, which provides a plausible explanation for the few significant differences between these samples. This interpretation is consistent with the finding of Rey-Biel, Sheremeta, and Uler (2016) that differences in their subject pools relate less to different views of fairness than to other factors, in the case at hand, to differences in the importance of self-interest. What lessons might these findings provide about practices or policies outside the laboratory? One result is that third parties allocate more equitably than stakeholders and even more so than stakeholders in an in-group. Thus, a manager removed from workers might reward individual worker contributions more strongly than workers themselves, e.g., acting through a labor union. Various studies identify disagreements about equity and equality as an obstacle to optimal cooperation. Our analysis indicates that there exists a relatively high level of consensus among third parties who possess high levels of information about contributions. Such spectators might help illuminate shared fairness views and focus on overcoming unwillingness to act on those views. Factors that produce shifts in fairness rules here might be employed to bring those with disparate views closer. Building in-groups, however, can be a double-edged sword. In-groups treat their fellow members both less selfishly and more equally, but they also act more selfishly toward their out-groups. This suggests attempts to create groups must be pursued with an appreciation for the importance of cooperation both within and across groups. Future research should examine further reasons why equity and equality vary with stakes and relationships to groups. One conjecture is that the variation observed in this experiment relates to the “proximity” of agents. That is, impersonal (or impartial) fairness preferences correspond to equity, but equity diminishes and equality rises with proximity, i.e., as decisions become more personal. Thus, impersonal spectators allocate equitably, whereas stakeholders also value equity but, being in a more personal relationship, allocate more equally, and, when they belong to an in-group, they allocate even more equally. For example, consider an academic department: even the most productive member would probably not insist on compensation in proportion to productivity differences, which might be several fold that of the least productive member. More generally, this conjecture is potentially relevant for many economic and social issues, e.g., it seems consistent with the ideal of judges as impartial third parties typically bound to the legal principle of proportionality but also with wage compression where collective bargaining is at work, e.g., Hibbs and Locking (1996). The current experiment is not designed to test these questions rigorously, but this is an avenue for future investigation. Another line of work could examine the robustness of our findings on the equity-equality trade-off to different methods, contexts, and types of decisions. Indeed, building on the results of the current study, Konow, Johansson-Stenman, Martinsson, and Medhin (2019) design a natural field experiment, the main results of which indicate that workers value both equity and equality with weights 16 Table A7 in Appendix C reports the results of Tobit regressions of In-group allocations on the entitlement and dummies for three dictator/ recipient pairings: male/female, female/female and female/male, where male/male is the omitted category. Only the entitlement and, in the US, the female/female dummy are significant.

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that vary with experience. Specifically, fairness beliefs appear to shift toward equality or equity in order to align more closely with actual experienced compensation. Acknowledgements We thank the Editor-in-Chief, the Guest Editor and three referees for many helpful comments and suggestions. We also acknowledge valuable feedback from Kjell Arne Brekke, Alexander Cappelen, Rachel Croson, Martin Dufwenberg, Robert Frank, Håkan Holm, Olof Johansson-Stenman, Stephan Kroll, David K. Levine, Karl Ove Moene, Karine Nyborg, John T. Scott, Matthias Sutter, Bertil Tungodden, and participants at various conferences and workshops. 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