Question

1. Anton and Klara must decide whether to be nice to each other. Klara has been given $5, and can decide whether to keep these $5 for herself or sacrifice the money for Anton. If she sacrifices the $5, Anton gets $10. Similarly, Anton has been given $5, and if he sacrifices his $5, Klara gets $10. However, Klara does not know Anton’s choices, believing that Anton has no choices to make and cannot get money unless she sacrifices for him. Anton is selfish: he wants to maximize the amount of money he receives from the interaction. Accordingly, he has decided to keep the $5 for himself. Note: Answer the following questions precisely by explicitly referring to the preference models where ever appropriate. ( please be really specific)

(a) (10 points) Suppose Klara has distributional social preferences, and no other types of social preferences (and Anton knows this).

i. Does Anton want Klara to know that he is receiving the $5 (without her knowing that he had a choice), does he not want her to know, or is he indifferent?

ii. Supposing that Klara is told about the $5, does Anton want Klara to know about the choice he had, does he not want her to know, or is he indifferent?

(b) (10 points) Suppose Klara has intentions-based social preferences, and no other types of social preferences (and Anton knows this).

i. Does Anton want Klara to know that he is receiving the $5 (without her knowing that he had a choice), does he not want her to know, or is he indifferent?

ii. Supposing that Klara is told about the $5, does Anton want Klara to know about the choice he had, does he not want her to know, or is he indifferent?

(c) (10 points) Now suppose Anton has face-saving concerns (in addition to his money maximizing preferences), and no other types of social preferences.

i. Does Anton want Klara to know that he is receiving the $5 (without her knowing that he had a choice), does he not want her to know, or is he indifferent?

ii. Supposing that Klara is told about the $5, does Anton want Klara to know about the choice he had, does he not want her to know, or is he indifferent?

Answer 1

(A)

(i) No, Anton does not want Karla to know that he is receiving $5 as Anton is selfish and he knows that if he let Karla know his choice, Karla will not sacrifice her $5 for him and he will get only $5 instead of getting $10.

(ii) If Karla is told about $5, Anton will still does not want Karla to know about his choice as Karla will not sacrifice her $5 for Anton is she got to know that Anton is also receiving $5.

(B)

(i) If Karla has intension-based social preference, Anton will never want Karla to know that he is receiving $5, as Karla will never sacrifice her $5 for Anton and Anton has to satisfy with $5 only because if Karla sacrificed her $5 for Anton, he will get $10 and Karla will get nothing.

(ii) If Karla is told about the $5, Anton will still does not want Karla to know his choice as he is selfish and he wants to convert his $5 into $10 by playing with Karla's intension as Karla will not sacrifice her $5 after knowing Anton's choice.

(C)

(i) If Anton has face-saving concerns, he will let Karla know about his choice and will tell Karla that he is also receiving $5 as not telling Karla will reveal his selfishness.

(ii) If Karla is told about $5, Anton will now definitely let Karla know his choice as this will result being nice to each other and this will also not reveal his selfishness to Karla and both will get equal money which is $5 each.