Reciprocity, Regret, and Reference Dependence: Essays in Applied Psychological Game Theory

Abstract

As economists are aware, belief-dependent motivations can have important implications for decision-making and economic outcomes. To incorporate such motivations into strategic interactions, Geanakoplos, Pearce, and Stacchetti (1989) and Battigalli and Dufwenberg (2009) propose a mathematical framework called “psychological game theory” (PGT). Under the framework, economists can mathematically explore how emotions, reciprocity, or image concerns shape interactive decision-making. This dissertation is a collection of three separate papers on belief-dependent motivations: reciprocity, regret, and belief-based loss aversion. While chapters are independent, they are all under the umbrella of psychological game theoretical applications. Reciprocity in a training problem In the first chapter, I explore the role of worker reciprocity in a general training problem. As empirical evidence finds, reciprocal concern plays an important role in labor relations (Akerlof, 1982; Fehr, Kirchsteiger, and Riedl, 1993; Kube, Marechal, and Puppe, 2006, 2012). However, few studies discuss the training problem. In this chapter, by applying the model of Dufwenberg and Kirchsteiger (2004) to describe worker reciprocal preference, I investigate an environment where the firm has no incentive to invest in general training under standard preferences. My theoretical result provides an alternative explanation of the firm’s sponsoring training—the negative reciprocity of the worker. Moreover, I also conducted a laboratory experiment to test this theory. The experimental design can disentangle the mechanism of reciprocity from the mechanism of other established social preferences in explaining employers’ sponsoring behaviors. The experimental results are consistent with my theoretical predictions. Regret in games The second chapter is a joint work with Martin Dufwenberg. In this chapter, our scope is broader—we model and derive properties in general situations in games where players care about regret. In this chapter, regret is captured by the gap between the payoff a player actually gets and his expected counterfactual payoff from the would-be best strategy among foregone actions. Ex-post beliefs, therefore, determine a player’s regret, which is affected by a player’s information across end nodes. We find novel aspects regarding how players interpret chance moves, mixed strategies, and the playing order. Belief-based Loss Aversion In the third chapter, I focus on an environment where a consumer has an opportunity to purchase a subscription. I show that in such an environment, consumer loss aversion, in the sense of Koszegi and Rabin (2006, 2009), derives an opposite prediction to that of risk aversion. Loss aversion leads the consumer to be more willing to subscribe. To fully exploit consumer loss aversion, the seller will in advance commit to a spot price, the price that the consumer would encounter if she does not subscribe.