Strategic Risk Aversion as an Explanation for Kenyan Farmers' High Offers
The high offers made by Kenyan farmer Proposers can be interpreted as a strategic response to risk rather than an act of pure generosity. Knowing that Responders in their community were very unlikely to accept low offers—for instance, data shows 89% of farmers accepted a 40% offer—Proposers would recognize the high risk of rejection for anything less. Therefore, even a purely self-interested farmer might make a high offer like 40% to avoid the outcome of receiving nothing, a decision that is not necessarily driven by altruism.
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Strategic Risk Aversion as an Explanation for Kenyan Farmers' High Offers
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In a one-shot interaction where a Proposer must split a sum of money with a Responder, the Proposer's most rational strategy is always to offer the smallest possible non-zero amount, because any accepted offer is better than the zero-payoff outcome of a rejection.
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In an economic experiment, a 'Proposer' is given $100 and must offer a portion of it to a 'Responder'. If the Responder accepts the offer, the money is split as proposed. If the Responder rejects the offer, both individuals receive nothing. The experiment is conducted with two distinct populations, Group A and Group B. The results show two key patterns:
- Proposers from Group A consistently make more generous offers (e.g., $40-$50) than Proposers from Group B (who often offer $10-$30).
- Responders from Group A are very likely to reject any offer below $40, while Responders from Group B frequently accept offers as low as $10.
Given this information, what is the most likely reason that a purely self-interested Proposer from Group A would make a high offer?
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In an economic game where a 'Proposer' offers a share of a sum of money to a 'Responder', a Proposer who is motivated solely by maximizing their own financial gain will calculate their offer by considering the potential payout of each possible split, weighted by the probability that the Responder will ____ that offer.
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In an economic game, a 'Proposer' has $100 to split with a 'Responder'. If the Responder rejects the offer, both get $0. The Proposer is purely self-interested, aiming only to maximize their own financial gain. The Proposer is considering two possible offers based on their knowledge of how Responders in their community typically behave:
- Offer A: Offer $20 to the Responder. The Proposer anticipates this has a 50% chance of being rejected.
- Offer B: Offer $40 to the Responder. The Proposer anticipates this has a 10% chance of being rejected.
Which offer should the Proposer make, and what is the correct reasoning?
Figure 4.18b: Actual Offers and Expected Rejection Proportions
Strategic Risk Aversion as an Explanation for Kenyan Farmers' High Offers
Figure 4.18a: Distribution of Offers Made by Proposers
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- In Group A, Proposers consistently offer 40-50% of the total sum.
- In Group B, Proposers consistently offer 10-20% of the total sum.
Assuming the Proposers in both groups are primarily motivated by a desire to maximize their own payoff while avoiding the risk of getting nothing, what is the most likely difference in the behavior of the Responders in these two groups?
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In an economic game where a 'Proposer' offers a share of a sum to a 'Responder' (who can accept or reject, with rejection leading to zero payoff for both), a purely self-interested Proposer who is behaving logically would always make the lowest possible offer to maximize their own potential share, regardless of how they expect the Responder to react.