How do third parties matter? Theory and evidence in a dynamic psychological game

Loukas Balafoutas ()

Working Papers from Faculty of Economics and Statistics, University of Innsbruck

Abstract: This paper analyses the impact of third party beliefs and payoffs on decision making, in the context of a three person repeated game. Two players can collude and increase their intertemporal payoffs, but doing so generates an externality for an inactive player (third party). The model assumes that some players are guilt averse and conditions their emotional responses on the perceived beliefs of the third party; this leads to a self-fulfilling mechanism, where beliefs tend to be confirmed through their impact on psychological payoffs. The experimental findings reveal that the third party’s beliefs are the dominant factor driving behaviour. On the contrary, third party payoffs do not seem to matter. These results are in line with the predictions of psychological game theory, extending them to third parties. Moreover, they give some insights on the relevant weight of different theories (social preferences, reciprocity, guilt) in the shaping of pro-social behaviour.

Keywords: psychological games; guilt; third party; corruption (search for similar items in EconPapers)
JEL-codes: C73 C91 D73 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cbe, nep-exp, nep-gth and nep-hpe
Date: 2009-01
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Persistent link: http://EconPapers.repec.org/RePEc:inn:wpaper:2009-01

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