In-group versus out-group trust: the impact of income inequality.
Lei, Vivian ; Vesely, Filip
1. Introduction
What promotes trust and what destroys it? Various studies have
shown that institutional development, age structure, population size,
religious composition, income inequality, and ethnic diversity are
linked to, and may directly impact, the overall trust level in a society
or community (see, for example, Knack and Keefer 1997; La Porta et al.
1997; Zak and Knack 2001; Knack and Zak 2002; Uslaner 2002; Zelmer 2003;
Berggren and Jordahl 2006; Bjornskov 2006). Of all these variables,
income inequality, measured by the Gini coefficient, is perhaps the most
consistent and robust determinant of social solidarity and trust:
Greater income inequality widens the social distance between different
income classes and thereby reduces the overall level of trust.
There are two things worth noting about this particular result.
First, while it can be shown with cross-country data that income
inequality is strongly associated with lower trust, the causal relation
between these two variables is not yet clear due to omitted variables
and endogeneity problems. Second, the measure of trust used in most of
the empirical literature is based on responses to the question
"Generally speaking, would you say that most people can be trusted
or that you can't be too careful in dealing with people?" from
the World Values Surveys. Responses to this survey question reflect at
best respondents' attitude regarding generalized trust, to say
nothing of the finding by Glaeser et al. (2000) that they are a much
better predictor of a society's overall level of trustworthiness
rather than of trust. Note that to study exactly how income inequality
affects trust, it is necessary to first identify what type of
trust--generalized or particularized trust--that the research question
is meant to address. Contrary to generalized trust that involves faith
in a wide range of strangers, particularized trust, also called in-group
trust, concerns faith in primarily in-group members--people of
"one's own kind" or people who share the same values and
norms via social ties or social identities (Uslaner 2002). Inequality
influences particularized trust by allowing social identities that are
associated with different income classes to be developed. Social
identities create similarity, and similarity cultivates trust among
in-group members (see, for example, Allport 1954; Coleman 1990; Fukuyama
1995; Alesina and La Ferrara 2000; Hardin 2006). While Allport (1954)
argues that in-group positivity does not necessarily imply out-group
negativity, income inequality could nevertheless activate out-group
hostility and further facilitate in-group favoritism if it creates
conflicts over scarce resources or political power between different
income classes (Sherif and Sherif 1953; LeVine and Campbell 1972; Brewer
1999).
Given the limited field data that can be directly used to measure
the impact of income inequality on particularized trust, this article
contributes to the literature by studying the relationship between
inequality and in-group favoritism in a stylized laboratory environment.
The specific research questions are as follows: Does income inequality
induce in-group favoritism in the sense that people trust their in-group
members more than they trust out-group members? And if so, would such an
in-group bias be strong enough to survive the removal of the inequality?
We divide the experiment into two parts. To introduce income
disparity in the first part of the experiment, we follow Anderson,
Mellor, and Milyo (2006) and randomly reward half of the subjects with a
common participation fee. (1) In other words, subjects are equally and
randomly divided into two groups: the rich and the poor (they are
referred to as "Type A" and "Type B," respectively,
in the experiment). Two treatments are adopted in order to investigate
if participants trust in-group and out-group members differently. The
first treatment involved a variant of the investment game introduced by
Berg, Dickhaut, and McCabe (1995). In this game, subjects are divided
into pairs that consisted of a first mover and a second mover. The first
mover is given the opportunity to transfer none, some, or all of his
10-franc cash endowment to his paired counterpart. The first mover has
no information regarding the second mover's identity, and is
required to specify the amount of money he wishes to transfer given two
possibilities: (i) the second mover is Type A, and (ii) the second mover
is Type B. Given the second mover's type and the first mover's
corresponding decision, all money passed on is tripled by the
experimenter and given to the second mover. The second mover, after
receiving the money, has the opportunity to return none, some, or all of
the money. The second mover, also having no information about her
counterpart's identity, is required to make a contingent decision
similar to the first mover's.
Note that if we simply compare the amounts sent to different types
in the above investment game, we will likely pick up motivations that do
not concern in-group and out-group trust. Therefore, we follow Cox
(2004) and introduce a variant of his dictator game as our second
treatment to disentangle transfers motivated by trust from transfers
motivated by other-regarding preferences. The dictator game is very much
like the investment game described above except that the second mover
has no decision to make and thus is not able to return any money even if
she wishes.
We study the impact of removing income inequality in the second
part of the experiment under two income conditions. Under the high
condition, a participation fee is rewarded to all subjects in a given
session. Under the low condition, no participation fee is rewarded to
anyone. In other words, subjects become either equally rich or equally
poor after experiencing the phenomenon of income disparity. No
redistribution policy is employed in order to avoid its effects being
compounded with those of trust and other-regarding preferences. Finally,
group labeling and thus affiliation (Type A and Type B) remain in effect
even after the income disparity is removed. Note that even though social
psychologists have found that the mere categorization of people into two
groups (the minimal group paradigm) is extremely effective in
cultivating in-group favoritism, there exists mixed evidence as to
whether or not group affiliation by itself would affect trust in the
economics literature. For example, while Guth, Levati, and Ploner (2005)
find no significant impact of group identity on first movers'
transfer decisions, Buchan, Johnson, and Croson (2006) find support for
in-group bias from a pool of American subjects. (2)
Our main findings are as follows. In the presence of income
inequality, we find that first movers, regardless of their income level,
tend to trust the rich significantly more than they trust the poor.
Since, for a given type of first movers, the proportions retuned from
the rich and the poor are not statistically different from each other,
we believe that such in-group and out-group trust on the part of first
movers is less likely to be a calculative move based on a norm or an
expectation that poor second movers, out of perhaps fairness concerns,
would keep more and return less. After income inequality is removed, we
find that most first movers, except those originally rich, become
equally trusting toward both the rich and the poor. This result suggests
that in-group as well as out-group favoritism can be alleviated by an
equal income distribution.
The rest of our article is organized as follows. Section 2
describes the experimental design and procedures and sections 3 and 4
report the results. Section 5 concludes with a brief summary and
discussion.
2. The Experiment
The experiment consisted of two treatments (games) and 16 sessions
executed in a between-subjects design. Sessions were conducted at the
University of Wisconsin-Milwaukee (UWM), Hong Kong University of Science
and Technology (HKUST), and City University of Hong Kong (CityU) between
March 2006 and July 2007. A total of 268 subjects were recruited either
from introductory economics courses (at UWM and CityU) or via a
university-wide e-Recruit system (at HKUST). Some of the subjects may
have participated in economics experiments before, but none had any
experience in experiments similar to ours. No subject participated in
more than one session of this study. On average, sessions lasted about
50 minutes including initial instruction period and payment of subjects.
The experiment was conducted in an experimental currency, called
"francs," which was converted to local currencies at a
predetermined and publicly known conversion rate. Subjects earned an
average of US$9.58. The experiment was computerized using the Z-tree
software package (Fischbacher 2007).
The two treatments were an investment game, built on Berg,
Dickhaut, and McCabe (1995), and a dictator game, built on Cox (2004).
Each treatment was made of eight sessions and each session was divided
into 20 rounds and two parts (Part I: rounds 1 to 10; Part II: rounds 11
to 20). At the beginning of each session, subjects were evenly and
randomly assigned to be one of the two types, labeled as Type A and Type
B, and to assume one of the two roles, labeled as First Mover and Second
Mover. It was equally likely for a participant to be a Type A First
Mover, a Type A Second Mover, a Type B First Mover, or a Type B Second
Mover. Types and roles remained fixed throughout all 20 rounds. All
participants received 10 francs as a cash endowment at the beginning of
each round to play the investment game or the dictator game, depending
on the treatment. To create income inequality in Part I of the
experiment, we followed Anderson, Mellor, and Milyo (2006) and gave each
Type A participant an extra 10 francs as a participation fee in each
round. The participation fee was not allowed to be used when playing
either one of the two games. To study the impact of eliminating income
inequality on trust in Part II, we introduced two income conditions: the
high condition and the low condition. Participants in a given session,
regardless of being Type A or Type B, all received a participation fee
under the high condition and nothing under the low condition. In other
words, participants in a given session became either equally rich (under
the high condition) or equally poor (under the low condition) in Part II
of the experiment. Summary information about each of the 16 sessions is
given in Table 1.
In the investment game, the computer randomly paired a first mover
with a second mover at the beginning of each round without revealing
each other's identity, including ID number and type. The first
mover was given the opportunity to transfer none, some, or all of his
10-franc cash endowment to his paired counterpart. Since the first mover
had no information regarding the second mover's identity, he was
required to specify the amount of money he wished to transfer given two
possibilities: (i) if the second mover was Type A or (ii) if the second
mover was Type B. The first mover made each of these two decisions by
clicking a button that indicated the amount he wished to transfer on the
computer screen. (3) Given the second mover's type and the first
mover's corresponding decision, all money passed on was tripled and
given to the second mover. The second mover, after receiving the money,
had an opportunity to return none, some, or all of the money she
received. The second mover, having no information about her counterpart,
was required to specify the amount of money she wished to return given
two possibilities: (i) if the first mover was Type A, and (ii) if the
first mover was Type B. Like the first mover, the second mover made
these decisions by clicking buttons that indicated the amounts she
wished to return on the computer screen. Money was returned to the first
mover based on his type and the second mover's corresponding
decision. (4)
At the end of each round, the computer displayed a summary screen
of both counterparts' types, the amounts of money received and
returned by the second mover, and their final period earnings including
the earnings from the game and, if applicable, the participation fee.
The intended amount of transfer or return that did not match the other
counterpart's type was not reported as part of the summary. To
minimize the impact of wealth effects, we randomly chose one round from
each part for payment at the end of the session.
The dictator game was very much like the investment game except
that the second mover had no decision to make and thus was not able to
return any money even if she wished.
The timing of activity in a session was as follows. Upon arriving
at the experiment, subjects were seated by their own choice of a
computer terminal in the laboratory. Once everyone was seated, the
instructions for Part I of the experiment were read aloud for the
subjects who followed along with their own copy of the text. The fact
that the experiment consisted of two parts was also written in the
instructions and thus was common knowledge to all participants.
Nevertheless, the exact contents of Part II were not revealed to
subjects until after Part I was completed. Subjects were allowed to ask
questions relating to Part I's rules or procedures at any time
during the instructional period. Rounds 1 to 10 proceeded after all
questions were answered. The instructions for Part II were handed out
and read aloud for the subjects after round 10 was concluded. Round 11
to 20 took place soon afterwards.
[FIGURE 1 OMITTED]
3. Results from Part I
Behavior of First Movers
Figure 1a presents the time series of the average transfers to
different income groups from Type A (rich) first movers from rounds 1 to
10 in the investment game. The black solid line, labeled I_Aa,
represents the average transfers to Type a (rich) second movers, whereas
the black dashed line, labeled I_Ab, represents the average transfers to
Type b (poor) second movers. (5) It is apparent from these two time
series that the amounts of transfers to the rich are slightly higher
than those to the poor. Across all 10 rounds in the eight sessions of
the investment game, Table 2 shows that the mean amount of transfers
from rich first movers was 3.02 to their rich in-group members and 2.80
to poor out-group members. Nevertheless, using each session as an
observation, a Wilcoxon matched-pairs signed-rank test suggests that the
difference between these transfers is not statistically significant at
any conventional level. (6)
The time series of the average transfers from Type B (poor) first
movers in the investment game is shown in Figure 1b. As in Figure 1a,
black solid and dashed lines, labeled I_Ba and I_Bb, represent transfers
to Type a (rich) and Type b (poor) second movers, respectively. The
general behavior pattern of poor first movers is very similar to that of
the rich in that they, too, slightly preferred rich rather than poor
second movers. The mean amount of transfers from poor first movers, as
shown in Table 2, was 3.19 to rich second movers and 2.99 to poor second
movers. Again, a Wilcoxon matched-pairs signed-rank test indicates that
these transfers are not significantly different from each other.
Next, we adopt a generalized least squares (GLS) random-effects
model that allows us to take advantage of the cross-sectional and
time-series variation in the data to investigate the effect of income
inequality on the relative amount sent. The dependent variable is the
difference between the amounts wished to send to a Type a (rich) and a
Type b (poor) second mover by subject i in round t. We control for the
difference between the actual proportions returned by a Type a (rich)
and a Type b (poor) second movers in the most recent previous rounds.
(7,8) In addition to the return difference, we also include round t to
capture the learning effect and a dummy variable that equals 1 for
sessions conducted in Hong Kong and 0 otherwise. Finally, as subjects
interacting with one another throughout 10 periods are more likely to
provide observations that are not independent, we correct such a
within-session correlation by clustering observations on the session
level. As a result, the statistical significance of our estimates is
less likely to be exaggerated. The results are summarized in Table 3.
Table 3 suggests that the relative amount sent was partially
motivated by the difference in the proportions returned. When the
proportion returned from Type a (rich) is 1% higher than that from Type
b (poor), Type A (rich) and Type B (poor) first movers, respectively,
sent 0.02 and 0.05 francs more to Type a (rich) relative to Type b
(poor). Also, a significantly positive constant term in Column 1
suggests that rich first movers at the beginning of the experiment sent
significantly more money to the rich than to the poor, although this
kind of in-group favoritism, as indicated by the estimate of round t,
decreases as time went by.
To sort out the part of transfers that was motivated by
other-regarding preferences, we need to turn to the data from the
dictator game. The time series of the average transfers from Type A
(rich) and Type B (poor) first movers in the dictator game are also
shown in Figures 1a and 1b. Gray solid lines in these two figures
represent transfers to rich second movers in the dictator game (D_Aa in
Figure la and D_Ba in Figure lb), whereas gray dashed lines represent
transfers to poor second movers (D_Ab in Figure la and D_Bb in Figure
lb). The first thing to note regarding the behavior pattern in the
dictator game is that first movers, regardless of their income level,
wished to transfer considerably more to the poor than to the rich
throughout all 10 rounds. Table 4 reports the mean amount of transfers
from first movers to second movers in the dictator game. Overall, rich
(poor) first movers in the dictator game intended to transfer 1.33
(0.94) to the rich and 2.47 (1.72) to the poor. Using each session as an
observation, Wilcoxon matched-pairs signed-rank tests reject the
hypothesis that the two transfers are the same for both rich and poor
first movers at the 1% level, suggesting that subjects on average had
significantly more other-regarding preferences toward the less fortunate
(p = 0.0117 in both cases).
Considering that there are substantial other-regarding preferences
especially toward the poor, our next focus is to investigate if there
exists any evidence indicating that first movers trust in-group members
more than they trust out-group members after the effect of
other-regarding preferences is being excluded. One can get an initial
sense of the data by examining Figures 2a and 2b. There are two stacked
columns in Figure 2a that represent average transfers from Type A (rich)
first movers in the investment game. The column labeled Aa shows the
average transfer to Type A's in-group members, and the column
labeled Ab shows the average transfer to their out-group members. For
each of these stacked columns, the white portion represents the average
transfer in the dictator game, and thus the remaining black portion
indicates the average transfer that is motivated by trust. Figure 2b is
read in a similar way.
[FIGURE 2 OMITTED]
Notice from Figure 2a that transfers from Type A (rich) first
movers to in-group members have substantial trust elements, whereas
transfers to out-group members appear to be mostly driven by
other-regarding preferences. In other words, even though these two
transfers are statistically the same in terms of their overall levels,
the compositions of these two transfers differ dramatically. Such
in-group favoritism, on the other hand, does not exist in the case of
the poor first movers as indicated by Figure 2b.
In the following, we conduct a more rigorous investigation of the
data by first comparing the initial decisions of first movers in the
investment game with those in the dictator game. These results are
summarized in Result 1. In Result 2, we examine the behavioral
difference between the investment game and the dictator game once first
movers became experienced.
RESULT 1. The inexperienced rich first movers trust the rich
significantly more than the poor. The inexperienced poor first movers,
however, do not distinguish between the two.
SUPPORT FOR RESULT 1. Let Aa and Ab denote the transfers from rich,
Type A first movers to rich and poor second movers, respectively. The
mean difference (Aa--Ab) in the first round is -0.03 in the investment
game and -0.82 in the dictator game. Treating each first mover's
decision as a relevant observation, a Mann-Whitney rank-sum test
suggests that the difference between (Aa--Ab) of the two games is
significant at the 5% level (p = 0.0262). (9) In other words, the
inexperienced rich first movers, on average, trusted the rich
significantly more than the poor at the very outset of the experiment.
As for the poor, Type B first movers, the mean difference (Ba--Bb) is
-0.59 in the investment game and -0.79 in the dictator game. Based on a
Mann-Whitney rank-sum test, the difference between (Ba--Bb) of the two
games is not statistically significant (p = 0.4237). QED.
RESULT 2. AS subjects gain experience, first movers, regardless of
the income level, trust the rich significantly more than the poor.
SUPPORT FOR RESULT 2. The mean difference (Aa--Ab) from round 2 to
round 10 is 0.25 in the investment game and -1.18 in the dictator game.
The mean difference (Ba--Bb) for the same nine rounds is 0.29 in the
investment game and -0.78 in the dictator game. Taking each session as
an observation, a Mann-Whitney rank-sum test suggests that the
difference between (Aa--Ab) in the investment game and that in the
dictator game is significant at the 1% level (p = 0.0027) for rich first
movers. The difference between (Ba--Bb) of the two games is significant
at the 5% level (p = 0.0460) for poor first movers. QED.
Behavior of Second Movers
As reported above, first movers regardless of their income level
chose to trust the rich more than the poor. Was such in-group (among the
rich) and out-group (from the poor toward the rich) trust a strategic
move that was based on an expectation that poor second movers, out of
fairness or equity concerns, would keep more and return less than rich
second movers? (10)
Table 5 reports the mean proportion returned, defined as the amount
the second mover wished to return divided by three times the amount the
first mover sent, across all 10 rounds and eight sessions in the
investment game. Type a (rich) second movers returned, on average,
17.84% to the rich and 24.50% to the poor. Type b (poor) second movers,
on the other hand, returned an average of 15.62% to the rich and 22.50%
to the poor. Wilcoxon matched-pairs signed-rank tests, taking each
session as an independent observation, confirm that second movers,
regardless of their income levels, returned more to the poor than to the
rich (p = 0.0357 for rich second movers and 0.0117 for poor second
movers). Since a Mann-Whitney rank-sum test suggests that the amounts
sent to a given type of second movers by A and B are not statistically
different in the investment game, we believe that returning relatively
more to poor first movers is mostly driven by other-regarding
preferences.
Although second movers had a tendency to discriminate against the
rich, we do not find that poor second movers, compared to those rich
ones, held stronger discrimination against or for a specific type of
first movers. Specifically, when we compare the proportion returned by
Type a versus the proportion returned by Type b, a Mann-Whitney rank-sum
test suggests that the difference is not statistically significant for
either type of first movers (p = 0.2480 for Type A [rich] first movers
and 0.5992 for Type B [poor] first movers). That being said, the fact
that first movers chose to send more to the rich even though it did not
pay them significantly more perhaps indicates that their behavior was
less likely to be a strategic move.
[FIGURE 3 OMITTED]
4. Results from Part II
Note that income inequality was removed in Part II of the
experiment by either giving all subjects a 10-franc participation fee in
each round under the high condition or no participation fee in any round
under the low condition. Nevertheless, the group identity remained the
same as in Part I. That is, even though there was no difference in
participants' per-round endowments, the minimal group paradigm was
in effect in Part II.
Behavior of First Movers
Figures 3a and 3b present the time series of the average transfers
from Type A and Type B first movers under the high condition. The
behavior of first movers in the investment game, regardless of being
Type A or B, was quite similar to that in Part I in the sense that
transfers to in-group members were not significantly different from
those to out-group members. This observation is consistent with the mean
amounts sent reported in Table 2. Type A (Type B) first movers under the
high condition in Part II, on average, sent 1.91 (1.45) to Type a second
movers and 1.82 (1.48) to Type b second movers. Wilcoxon signed-rank
tests cannot reject the hypothesis that the amount sent to Type a is the
same as that to Type b.
In the dictator game, after everyone became equally rich, Type A
first movers continued to behave more altruistically toward Type b
second movers as in Part I. The mean amount sent, summarized in Table 4,
was 1.18 to Type a and 1.83 to Type b. A Wilcoxon signed-rank test
rejects the hypothesis that the amounts sent to Types a and b are the
same at the 10% level (p = 0.0947). Type B first movers, previously
treating their own group members more favorably in Part I, no longer
differentiated between the two groups in Part II. Therefore, after
taking into account other-regarding preferences, those originally rich
Type A first movers continued to have more trust toward in-group members
than toward out-group members under the high condition. On the contrary,
the newly rich Type B first movers became equally trusting toward both
in-group and out-group members. The overall inter-group trust attitudes
under the high condition can be seen in Figures 4a and 4b.
[FIGURE 4 OMITTED]
RESULT 3. Eliminating income inequality in a way that makes
everyone equally rich does not change the behavior of the originally
rich but does make the newly rich first movers behave with equal trust
toward both in-group and out-group members.
SUPPORT FOR RESULT 3. The mean difference (Aa--Ab) from round 11 to
round 20 under the high condition is 0.09 in the investment game and
-0.65 in the dictator game. If we take each session as a relevant
observation to account for the possible within-session correlations, a
Mann-Whitney rank-sum test suggests that the difference between (Aa--Ab)
in the investment game and that in the dictator game is significant at
the 5% level (p = 0.0433) for the originally rich Type A first movers.
The mean difference (Ba--Bb) from round 11 to round 20 is -0.03 in the
investment game and 0.04 in the dictator game. A Mann-Whitney rank-sum
test suggests that the difference between (Ba--Bb) of the two games is
not significant (p = 0.5637) for the newly rich Type B first movers.
QED.
The time series of the average transfers from Type A and Type B
first movers under the low condition are presented in Figures 5a and 5b,
respectively. Figure 5a suggests that the amounts of money that Type A
first movers wished to transfer to in-group or out-group members were
almost indistinguishable after they no longer received a 10-franc
participation fee per round. This is true not only in the investment
game but also in the dictator game. That is, after becoming equally poor
as Type B, Type A first movers stopped discriminating against those
originally poor Type B members. Figure 5b offers a similar picture as
Figure 5a. The lack of inter-group discrimination in terms of trust
attitudes can be seen in Figure 6 as well.
RESULT 4. Eliminating income inequality in a way that makes
everyone equally poor causes first movers, originally poor as well as
newly poor, to behave with equal trust toward both in-group and
out-group members.
SUPPORT FOR RESULT 4. The mean difference (Aa--Ab) from round 11 to
round 20 under the low condition is 0.01 in the investment game and 0.18
in the dictator game. If we take each session as an independent
observation, a Mann-Whitney rank-sum test shows that the difference
between the two games is not significant for the newly poor, Type A
first movers (p = 0.1913). The mean difference (Ba--Bb) from round 11 to
round 20 is 0.28 in the investment game and -0.68 in the dictator game.
A Mann-Whitney rank-sum test cannot reject the hypothesis that (Ba--Bb)
in the investment game is the same as that in the dictator game for the
originally poor Type B first movers (p = 0.1913). QED.
[FIGURE 5 OMITTED]
Behavior of Second Movers
Table 5 shows that, under the high condition, Type a second movers
returned, on average, 13.46% to Type A and 12.10% to Type B. Type b
second movers, on the other hand, returned an average of 15.78% and
15.69% to Type A and B, respectively. Wilcoxon signed-ranked tests
indicate that the difference between the proportions returned to A and B
is not statistically significant for either type of second movers. The
result that second movers did not discriminate between Type A and Type B
also holds under the low condition.
[FIGURE 6 OMITTED]
5. Conclusion
Trust, as noted by Arrow (1974), is an essential lubricant of a
society, and income inequality has been shown to consistently undermine
it. Some hypotheses have been put forward to explain how income
inequality affects trust. As we describe in the introduction, income
inequality could reduce trust by allowing social identities to be formed
on the basis of income status, thus triggering in-group favoritism.
In this article, we adopt a variant of Berg et al.'s trust
game and Cox's dictator game to study if income inequality can
indeed activate in-group favoritism and if so, whether or not such a
bias is strong enough to survive the removal of inequality. In the first
part of the experiment, we find evidence of in-group favoritism on the
part of rich first movers. Rich first movers trust their in-group
members significantly more in the presence of income inequality not only
before but also after they gain experience. Poor first movers, in
contrast, do not exhibit in-group bias. They do not discriminate between
in-group and out-group at the very outset of the experiment, and once
they become experienced, they behave with significantly more trust
toward the rich than toward the poor.
The result that income status has a powerful impact on inter-group
relations does not appear to result from a norm or an expectation that
trusting the poor does not pay as much as trusting the rich.
Nevertheless, it is consistent with the social identity theory, which
hypothesizes that high-status group members display greater in-group
favoritism in order to strive for positive distinctiveness, and that
low-status group members could behave more favorably rather than
discriminatorily toward high-status out-group members if they perceive
the status structure as being legitimate and/or stable (Tajfel and
Turner 1979). (11) In our experiment, there are design features that,
according to the theory, may activate out-group favoritism on the part
of poor first movers. First, we randomly divide subjects into the rich
and the poor without any subjective judgments. This may make it easier
for subjects to accept the status differential as legitimate. Second,
economic status remains fixed throughout the first part of the
experiment. This could facilitate the perception of status stability. Of
course, the presence of income inequality that is not accompanied by
conflicts over scare resources or even political power could further
mitigate out-group hostility in our environment.
In the second part of the experiment, we find that eliminating
income inequality makes most first movers, except those originally rich,
behave with equal trust toward both the rich and the poor. This result
suggests that in-group and out-group favoritism established in the past
can be alleviated, but not completely removed, by a more balanced income
distribution.
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Vivian Lei * and Filip Vesely ([dagger])
* Department of Economics, University of Wisconsin-Milwaukee, 3210
N. Maryland Avenue, Bolton Hall 818, Milwaukee, WI 53201, USA, and
Department of Economics and Finance, City University of Hong Kong, Hong
Kong; E-mail vlei@uwm.edu; corresponding author.
([dagger]) Department of Economics, University of
Wisconsin-Milwaukee, 3210 N. Maryland Avenue, Bolton Hall 812,
Milwaukee, WI 53201, USA, and Department of Economics, Hong Kong
University of Science and Technology, Hong Kong; E-mail vesely@uwm.edu.
We are particularly grateful to the Center for Research on
international Economics at the University of Wisconsin-Milwaukee, City
University of Hong Kong, and Hong Kong University of Science and
Technology for financial and laboratory support. We thank Kenneth Chan,
John Heywood, Kamhon Kan, Steven Tucker, two anonymous referees, and
participants at the 2007 Economic Science Association North American
Regional Meeting and the 10th Experimental Economics Days, Dijon for
valuable comments. We thank CiCi Lo and Jennifer Tse for excellent
research assistance.
Received September 2008: accepted June 2009.
(1) In Anderson, Mellor, and Milyo (2006), income inequality was
introduced by varying show-up fees across participants. For instance, in
the treatment with symmetric distribution, three of the eight subjects
recruited for a given session received $10, two received $7.50, and
three received $5 as a show-up payment.
(2) See Anderson, Fryer, and Holt (2006) for an extensive survey of
experimental evidence on discrimination.
(3) Transfers were restricted to integers.
(4) Falk and Zehnder (2007) adopt a similar design feature in their
citywide trust experiment conducted in Zurich, Switzerland. In their
experiment, both first and second movers were asked to make transfer and
return decisions based on Zurich's 12 residential districts.
(5) In the rest of the article, we will use upper- (A and B) and
lower-case letters (a and b) to distinguish between first and second
movers.
(6) Since allowing subjects to interact with each other is most
likely to result in observations that are not independent, here we
choose a whole session rather than an individual decision maker as an
observation.
(7) Note that, in our experiment, money was returned to the first
mover based on his type and the second mover's corresponding
decision. That is, even though the second mover in our experiment was
required to indicate the amounts of money she wished to return to
different types of first movers, her matched counterpart nonetheless had
no information about her alternative return decision. Therefore, in the
regression, we consider only the actual proportions returned that were
observable by the first mover.
(8) For example, suppose that a given first mover happens to be
paired with Type a (rich) second movers in rounds 1 and 2, and Type b
(poor) second movers in rounds 3 and 4. In round 5, we control for the
difference between the proportion returned by the Type a second mover in
round 2 and the proportion returned by the Type b second mover in round
4.
(9) Since no interaction had occurred before first movers made
their transfer decisions in round 1, we take each decision maker rather
than a whole session relevant observation when investigating the
inexperienced subjects' behavior.
(10) We thank both referees for pointing out this possible
explanation for first movers' behavior.
(11) For laboratory and survey-based evidence that supports social
identity theory, see Doise and Sinclair (1973), Commins and Lockwood
(1979), Sachdev and Bourhis (1987, 1991), and von Hippel (2006).
Table 1. Summary of Experimental Sessions
Treatment Condition in Part 11 Number of
Session (Game) (No Inequality) Subjects Location
1 Trust High 16 UWM
2 Trust High 20 UWM
3 Trust Low 16 UWM
4 Trust Low 16 UWM
5 Trust High 20 HKUST
6 Trust Low 16 HKUST
7 Trust High 16 HKUST
8 Trust Low 16 HKUST
9 Dictator High 16 HKUST
10 Dictator High 20 HKUST
11 Dictator High 16 HKUST
12 Dictator High 16 HKUST
13 Dictator Low 16 Cityu
14 Dictator Low 16 Cityu
15 Dictator Low 16 Cityu
16 Dictator Low 16 Cityu
Table 2. Data Summary of Amount Sent in the Investment Game
Part I (Inequality) Part II (No Inequality)
All High Condition
To Type a To Type b To Type a To Type b
Type A First Movers 3.02 2.80 1.91 1.82
(3.35) (3.35) (3.32) (3.21)
[340] [340] [180] [180]
Type B First Movers 3.19 2.99 1.45 1.48
(3.54) (3.42) (2.56) (2.72)
[340] [340] [180] [180]
Part 11 (No Inequality)
Low Condition
To Type a To Type b
Type A First Movers 2.37 2.36
(3.11) (3.18)
[160] [160]
Type B First Movers 3.06 2.79
(3.64) (3.43)
[160] [160]
Amount sent is out of 10 francs. Standard deviations
are in parentheses. The number of observations appears
in brackets.
Table 3. Results of GLS Random-Effects Models for Difference
in Amount Sent in Part I
(1) (2)
Type A Type B
Constant 2.17 ** (0.99) -0.23 (0.91)
Difference in proportion returned 0.02 * (0.01) 0.05 *** (0.01)
Period -0.22 * (0.12) 0.08 (0.07)
HK -0.25 (0.61) -0.57 (0.82)
Observations 181 186
Standard errors, shown in parentheses, are adjusted for within-session
correlations. significant at the 1%, 5%, and 10% levels, respectively.
Table 4. Data Summary of Amount Sent in the Dictator Game
Part I (Inequality) Part II (No Inequality)
All High Condition
To Type A To Type B To Type A To Type B
Type A First Movers 1.33 2.47 1.18 1.83
(2.40) (2.99) (2.67) (3.15)
[330] [330] [170] [170]
Type B First Movers 0.94 1.72 0.36 0.32
(1.83) (2.40) (1.32) (0.99)
[330] [330] [170] [170]
Part 11 (No Inequality)
Low Condition
To Type A To Type B
Type A First Movers 1.18 1.00
(2.28) (1.87)
[160] [160]
Type B First Movers 0.44 1.11
(1.32) (2.33)
[160] [160]
Amount sent is out of 10 francs. Standard deviations
are in parentheses. The number of observations appears
in brackets.
Table 5. Data Summary of Proportion Returned in the Investment Game
Part I (Inequality) Part 11 (No Inequality)
All High Condition
To Type A To Type B To Type A To Type B
Type a Second 17.84 24.50 13.46 12.10
Movers (21.30) (25.68) (19.24) (19.09)
[217] [217] [61] [61]
Type b Second 15.62 22.50 15.78 15.69
Movers (19.67) (24.61) (20.41) (20.42)
[211] [211] [64] [64]
Part II (No Inequality)
Low Condition
To Type A To Type B
Type a Second 22.57 22.76
Movers (26.75) (26.96)
[76] [76]
Type b Second 20.01 19.74
Movers (26.49) (26.50)
[94] [94]
Proportions returned are reported as percentages. Standard deviations
are in parentheses. The number of observations appears in brackets.
