Diminishing sensitivity for other-regarding preferences for university undergraduate research fellows

Abstract

Because of the pervasiveness of diminishing sensitivity in economics, and because diminishing sensitivity has played such a crucial role in examining behavior toward risk, diminishing sensitivity for other-regarding preferences is explored using several proposed models and the equal-division equivalent. By placing restrictions on the models suggested by Fehr and Schmidt and by Charness and Rabin, inequity aversion and diminishing sensitivity can be guaranteed when the player is ahead and behind opponents. There are no simple restrictions that will guarantee diminishing sensitivity in the models suggested by Neilson and Stowe and by Bolton and Ockenfels when the decision-maker is ahead of his opponents. Thus if diminishing sensitivity is a desirable property of a model of other-regarding preferences, the Neilson-Stowe and Bolton-Ockenfels models are not appropriate. For both the Fehr-Schmidt and Charness-Rabin models, the restrictions for diminishing sensitivity imply a dislike of a Robin Hood scheme that redistributes wealth from a higher-payoff opponent to a lower-payoff opponent. While one interpretation of this result is that diminishing sensitivity is not desirable in the context of other-regarding preferences, the problem actually is with the models themselves. Because the models only consider inequity aversion between the decision-maker and each individual opponent rather than a type of inequity between opponents, these models yield a dislike of redistribution of wealth from high-payoff players to low-payoff players. Therefore these results suggest that perhaps other models should be constructed which allow for diminishing sensitivity and a preference for a redistribution of wealth.