Inequality Aversion and Efficiency with Ordinal and Cardinal Social Preferences –
An Experimental Study

Dorothea K Herreiner, Economics Department, Loyola Marymount University
Clemens Puppe, Department of Economics, University of Karlsruhe

Abstract:
In this paper, we report on a series of free-form bargaining experiments in which two players have to distribute four indivisible goods among themselves. In one treatment, players are informed about the monetary payoffs associated with each bundle of goods; in a second treatment only the ordinal ranking of the bundles is given. We find that in both cases, inequality aversion plays a prominent role. In the ordinal treatment, individuals apparently use the ranks in the respective preference orderings over bundles of goods as a substitute for the unknown monetary value. Allocations that distribute the value (money or ranks, respectively) most equally serve as natural “reference points” for the bargaining processes. Frequently, such “equal split” allocations are chosen by our subjects even though they are Pareto dominated; but also if they are rejected for that reason they matter in a specific way: whether a Pareto optimal allocation is chosen or not depends on whether or not it is a Pareto improvement relative to the equal split. Interestingly, we find much less Pareto-damaging behavior due to inequality aversion in the ordinal treatment.

Keywords: Fairness, Envy Freeness, Social Preferences, Bargaining
JEL Classification: D630, C790, C910, A130

Current Version: August 2009   [pdf]

Forthcoming: Journal of Economic Behavior and Organization