The socioeconomics of emotional commitments

The Socioeconomics of Emotional Commitments

LIWAY

LEE*

Wayne State University

ABSTRACT: The article establishes the limits of emotions in promoting efficiency. The article uses a model of joint production to analyze three pairings of emotions: mutual benevolence, benevolence-malevolence, and mutual malevolence. The analysis suggests that the economic performance of an emotion depends on which emotion it is paired with. With proper pairing, a good emotion can be relatively inefficient and a bad emotion can be relatively efficient.

INTRODUCTION Economic theory treats emotions as commitment devices, ways of taking a course of action and sticking to it. Since emotions are deeply ingrained and thus remain beyond the reach of opportunistic control, emotion-driven actions are predictable and credible commitments. According to this commitment theory, noble emotions like benevolence facilitate cooperation, and therefore promote economic efficiency. That is their evolutionary justification. Becker (198 1) shows that benevolence can induce cooperation from selfish partners. Hirshleifer (1987a, 1987b) demonstrates that all forms of cooperation are based on rules of social interaction, rules partly ingrained as emotions or ethics. Frank (1987, 1988) argues that moral behaviors are compatible with long-run material gains, even though they seem * Direct all correspondence to: Li Way Lee, Department

of Economics,

M 148202. The Journal of Socio-Economics, Volume 22, Number 3, pages 289-294 Copyright @ 1993 by JAI Press Inc. All rights of reproduction in any form reserved. ISSN: 1053-5357

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irrational from the point of view of each isolated incident. As to ignoble emotions like envy or maliciousness, the conventional wisdom is that they have more limited potential in promoting economic efficiency. Hirshleifer (1987b) argues that their social value lies principally in deterring equally ignoble behaviors. The existing literature thus has been preoccupied with establishing the efficiency of emotional commitments. Yet as theories of price system, government, and firm have shown, there are limits to efficiency-promoting institutions; and discovering the limits can be a useful theoretical activity. Consider Arrow’s work on the price system (1971) Stigler’s work on government (1971), and Coase’s work on firm (1937). In this article I explore the efficiency limits of institutions arising from emotional commitments. Using a model ofjoint production, I examine pairings of two simple emotions: benevolence and malevolence. For each pairing (mutual benevolence, benevolence-malevolence, and mutual malevolence), I establish its limit in economic efficiency. I show that, contrary to the conventional wisdom, it is not possible to rank these pairings in terms of I conclude that the economic performance of an economic efficiency. institution depends on its emotional composition, that is, on its sociology of emotions.

EMOTIONAL

INSTITUTIONS

AND EFFICIENCY LIMITS

Commitments mean inflexibility, and where negotiation or bargaining is required for efficiency, the lack of flexibility can be a costly handicap. This can be illustrated in three contexts that we represent by pairings of emotions. Because emotional commitments are not subject to rational manipulations, they cannot be compromised through negotiations. I employ a two-person model of cooperation. If two persons do not form a cooperative relation, they would each have an “autarkic” income, say zero. These autarkic incomes provide the reference point for assessing the efficiency of whatever cooperative relation they form. The possibilities of cooperation can be described by an “income production frontier” like MN in Figure 1. The various income bundles represent what are technically possible. If the two persons are rabbit trappers, and they cooperate, they can divide the tasks of setting traps and collecting rabbits in various ways. If person A sets traps, and person B collects rabbits, then they may choose to produce in the manner of point N. That does not mean B gets to keep all the rabbits. For they may expect a redistribution of the rabbits, along the 135degree line from N. Note that if they choose to produce at J, they would have the most joint income to redistribute. So we say J is the socially efficient production technique.

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of Emotional Commitments

A’s income

income Figure 1:

The Inefficiency

Mutual

of Mutual

Benevolence

Benevolence

A question that has received much attention in the recent literature is how the noble emotion of benevolence can survive natural selection (Hirshleifer, 1987a; Frank, 1987, 1988). The standard answer is that nice people survive by working with each other. It is presumed that a nice person would do well materially when paired with another nice person. The answer is not exactly correct. For one thing, as Becker (198 1) has shown, nice people can do very well when paired with selfish people. I will show later that nice people still can do well when paired with very nasty people. In this section, I show that nice people may do poorly when paired with themselves. Figure 1 depicts a situation faced by two individuals A and B. Both are benevolent: each is committed to sharing joint income so that the other person gets proportionally more when there is more joint income. Their commitments to income distribution are described by a pair of offer curves, OCA and OCB. It is quite clear in the figure that, whatever the sequence of moves in production and distribution, there is only one level of income at which they will come to an agreement regarding distribution, and that is the income associated with T, where their offer curves intersect. At T, their commitments to benevolence are mutually consistent. Unfortunately, the income at T falls short of the maximum possible level, which comes about from producing at J. Mutual benevolence, therefore, results in an inefficient outcome. Mutual benevolence is unlikely to escape from this inefficiency. First, one can show that the more each wants to give to the other, the less they together would have. One may imagine a series of snapshots differing in the way the offer curves cross. If the individuals are more benevolent than shown, that is,

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income

M

0

F Figure 2:

B’s i ncome

N The Malevolence-Benevolence

Equilibrium

if each wants to give the other proportionately more even when the level of joint income is very low, then the offer curves will move toward each other, eventually intersecting only at 0. There, the joint income is zero, so each would do no better than if there were no cooperation. Conversely, if the two are less benevolent than as shown, then they together would have more. In Figure 1, the offer curves will move farther apart, taking their intersection T toward the income-production frontier. The efficiency of the equilibrium improves. Eventually T coincides with a point on the income-production frontier, but that point is unlikely to be J, where the joint income is maximized. As mutual benevolence diminishes further, the offer curves would intersect outside the Since the intersection point then becomes income-production frontier. infeasible, disequilibrium sets in. The practical implication here is that it is inefficient for people who are emotionally predisposed to benevolence to work together. For example, close kin may be committed to enhancing each other’s well-being. They may go through many iterations before they find a family income level at which they would agree about income distribution. But that family income likely will fall short of the maximum possible, as we just showed. Malevolence-Benevolence

According to Adam Smith (1759, p. 395) “envy is that passion which views with malignant dislike the superiority of those who are really entitled to all the is a worse emotion than envy. A superiority they possess.” Malevolence malevolent person uses his wealth to impoverish his victim. He is satisfied only when he has completely deprived his victim, or when the marginal cost of further depriving his victim exceeds the marginal satisfaction from it (Hirshleifer, 1987b).

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A’s income

B’s income Figure 3:

The Mutual-Malevolence

Equilibrium

This horrible emotion, however, does not imply that a cooperative venture where the emotion is an ingredient must necessarily have relatively poor performance. To illustrate this, suppose that A is benevolent and B is malevolent, and that they face the income-possibility frontier in Figure 2. Because A is benevolent, he wants to distribute joint income according to offer curve OCA. B, however, is interested not in redistribution, but in using his income to reduce A’s. When a cooperative arrangement provides him with relatively more income, he would use some of it to minimize A’s gain from cooperation, without driving A away. When his income from cooperation is lower than A’s, he cannot afford to deprive A to an extreme degree since he always must use his own income to impoverish A. In effect, then, B’s malevolence implies an offer curve MFN. Now when A and B form a joint venture, when their emotions make them insist on their respective offer curves, there is only one cooperative arrangement that would satisfy them both. And that is the intersection point S. While S is not the optimum J, neither is S necessarily inferior to the outcome of mutual benevolence (T in Figure 1). So we have the paradoxical result that an institution with a bad emotion may be more productive than one without. Mutual

Malevolence

An even more paradoxical result is that a joint venture between two malevolent persons may yield the highest relative economic efficiency. To see this we go to Figure 3, where both A and B are malevolent. As in Figure 2, B has offer

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curve MFN. By analogous reasoning, A has offer curve NDM. These offer curves cross at three points: M, R, N. At either of M and N (the extreme productive arrangements), malevolence is deterred because one party has no wherewithal and the other has no reason for malevolence. These arrangements therefore are equilibriums. At the interior equilibrium R, both malevolent persons feel satisfied after having reduced each other’s income. None of these equilibriums is socially efficient (see J). But none is necessarily inferior to the outcome of mutual benevolence (see T in Figure 1). CONCLUSION Economic efficiency probably underlies our tendency to label some emotions as good and others as bad. These labels, as this paper has demonstrated, are simplifications. When social interactions involve strong emotions, emotions that carry credible commitments, economic efficiency and emotion no longer have a simple relation. Depending on the other emotion it encounters, a good emotion may result in relatively low economic efficiency and a bad emotion in relatively high economic efficiency. These paradoxes unveil an unexpected layer of complexities in social interactions. REFERENCES K.J. (1971). Essays in the theory of risk-bearing. Chicago: Markham. G.S. (1981). A frearise on thefamily. Harvard University Press. R. (1937). The nature of the firm. Economica 4 (November): 386-405. R.H. (1987). If homo economicus could choose his own utility function, would he want one with a conscience? American Economic Review 77 (September). Frank, R.H. (1988). Passions within reason. New York: Norton & Co. Hirshleifer, J. (1987a). Economic behavior in adversify. Chicago: University of Chicago Press. Hirshleifer, J. (1987b). On the emotions as guarantors of threats and promises. In The latest on the best; Essays in evolution and optimalify, edited by J. Dupre. MIT Press. Smith, A. (1976) 117591. The theory of moral sentiments. Indianapolis: Liberty Classics. Stigler, G. (1971). The theory of economic regulation. Bell Journal of Economics 2 (Spring): 3-21. Arrow, Becker, Coase, Frank,