Two Essays of Other-Regarding Preferences' Influence on Social Decision Making

Abstract

This paper investigates the influence of two representative other-regarding preferences on specified issues. The first chapter studies the preferred tax rate and labor supplies of voters in the presence of income inequality aversion in a two-stage redistribution game. The two-stage redistribution game consists of a first stage in which voters vote for a flat tax rate on income with the revenues redistributed evenly and a second stage in which workers, who are also voters, provide the labor supplies with the tax rate given. I specify inequality aversion preferences into two ways: The payoff inequality aversion represents people's preference to divide their material payoff evenly, and the income inequality aversion represents people's preference to divide their income evenly without considering their efforts to earn that income. In conclusion, payoff inequality-averse workers provide the same labor supplied as a worker who does not have any inequality aversions (a standard worker) but prefers a higher tax rate to a standard worker. The income inequality-averse workers, first, provide their labor supply considering their positions in a skill distribution and, therefore, adjust their labor supply such that the income curve becomes flatter. High-skilled workers tend to earn less income, while low-skilled workers tend to earn more income. Second, the income share of the richest decreases with the degree of inequality aversion up to a point. Third, inequality-averse workers do not necessarily prefer a higher tax rate to a standard worker, mainly because some level of income inequality is already self-adjusted in the second stage. The second chapter looks at how reciprocal preferences influence coalition size in international environmental agreements. Reciprocal preferences represent how a decision maker gains an additional positive utility when it responds to a kind action with a kind action or to an unkind action with an unkind action. I incorporate reciprocal preferences in a two-stage game that predicts the decision of each government to participate in an agreement that decreases pollutant emissions. The main result shows that bigger coalition forms than the standard preference does not include reciprocal preferences. Reciprocal governments that participate in the treaty (signatories) suffer from unkindness based on pollution by non-signatories so that the threat to retaliate by polluting becomes credible. Then, free-rider governments (non-signatories) on the margin surrender to the implicit threat and participate in the treaty. Furthermore, including reciprocity reverses the usual result that there is an inverse relationship between the marginal benefit and coalition size. In other words, the size of coalition increases with the marginal benefit of abatement in an equilibrium when the reciprocal sensitivity is sufficiently high. Signatories are more likely to retaliate against non-signatories because the benefit to non-signatories of refraining from decreasing emissions aggravates the unkindness to signatories.