1. Introduction: aim, overview and relevance for institution design

Productive institutions such as firms should be efficient but also, ideally, fair.

Much of new-institutional economics however purports to design institutions from the sole viewpoint of efficiency, neglecting distributive concerns – some examples in the theory of the firm, are: Hansmann (Reference Hansmann1988), Williamson (Reference Williamson1975), Grossman and Hart (Reference Grossman and Hart1986), Hart and Moore (Reference Hart and Moore1990). The general point is made by Kaplow and Shavell (Reference Kaplow and Shavell2002) and, in the social contract tradition, by Buchanan (Reference Buchanan1975). This may be because working in the perspective of efficiency (Pareto optimality), institution design can be shown to be incentive compatible, given that Pareto-optimality appeals to mutual interest. Adopting the perspective of justice seems too demanding for a realistic effort of institution design because real-world motivations are too removed from what would be necessary for a spontaneous adherence to principles of justice. It is no coincidence that ‘opportunism’ is the assumed model of behavior (Williamson, Reference Williamson1975, Reference Williamson1985).

This is in contrast with much theoretical work on justice that is aimed at devising a hypothetical choice model to test the justice of fundamental social institutions. Several traditions of ethical and political thought have proposed hypothetical original positions from which individuals allegedly choose or agree on principles of social justice. This ex-ante hypothetical choice is conceived as a context of ignorance or uncertainty so that the parties cannot be defending particular interests. While this method is hypothetical, it suggests realism insofar as the choice on principles is derived from prudentially rational motives. Once agreement is reached, and the veil of ignorance lifted up, it is claimed that just institutions, framed according to agreed principles, will be complied with and remain stable thanks to the development of a behavioral attitude called the ‘sense of justice’ (Rawls, Reference Rawls1971). This is elicited by the very agreement on principles, plus mutual beliefs of reciprocal compliance.

It must be noted that even in the theory of justice tradition it is not uncontroversial whether distributive justice may enter the domain of economic institutions. Some authors have affirmed that the extension to productive institutions is intrinsic to Rawlsian theories of justice and should be developed (Fia and Sacconi, Reference Fia and Sacconi2019; Sacconi, Reference Sacconi2006, Reference Sacconi, Sacconi, Blair, Freeman and Vercelli2011a, Reference Sacconi, Sacconi and Degli Antoni2011b); others have taken the opposite view (Mansell, Reference Mansell2013; Singer, Reference Singer2015). Our research question may settle these controversies, at least in so far as they concern the question whether the request of designing productive institutions (like firms) according to principles of distributive justice could be too demanding.

In this paper we use an experiment to answer three related questions:

1. 1) Does the introduction of an ex-ante veil of ignorance process – where agreement over a non-binding rule for distribution has to be reached – identify a dominant rule?

2. 2) Do people comply with the agreed-upon distributive rule when they actually decide how to allocate a shared output?

3. 3) Is the actual distribution when there is such an ex-ante procedure different from the one obtained in its absence?

Our results suggest that, first, subjects predominantly select a rule of distribution that can arguably be identified with liberal-egalitarian justice; second, people do generally comply, but more so when (a) the ex-ante process is an informal deliberation carried out in natural language rather that formal bargaining, and (b) when they expect their co-player to comply; and third, the distribution in treatments with ‘veil of ignorance’ is far more consistent with the ideals of fairness than it is in the control treatment.

These results are relevant for institutional design in at least two ways.

First, they show that by introducing an ex-ante collective choice procedure offering agents the opportunity of reaching an impartial agreement on distributive principles the pattern of behavior changes substantially. We understand such a behavior as entirely consistent with the ‘equilibrium view’ of institutions: endogenous regularities of behavior (conform to normative principles) emerge from strategic interaction and are reflected in players' mental representation by means of reciprocal beliefs (see Aoki, Reference Aoki2001, Reference Aoki2007; Hindrinks and Guala, Reference Hindriks and Guala2015 and the following debate: Aoki, Reference Aoki2015; Searle, Reference Searle2015; Sugden, Reference Sugden2015; see also Hodgson, Reference Hodgson2006).

A natural interpretation of our experimental results is that devising a collective choice procedure that permits subjects to agree under a veil of ignorance induces the actual convergence on a certain principle of distributive justice. And then, agents' behavior will de facto converge on playing individual strategies compliant with the agreed principle, even if this is not prima facie in their self-interest

The second way in which the results are relevant for institutional theory is in that it experimentally supports the bearing of the social contract view of institutions (see, for an analogous test, Ostrom et al., Reference Ostrom, Walker and Gardner1992). This experiment takes the social contract, so to speak, to the lab, and shows that some social contract theoretical predictions are consistent with the observed behavior of subjects in experimental conditions (for previous results on the same line of research see Faillo et al., Reference Faillo, Ottone and Sacconi2015; Sacconi et al., Reference Sacconi, Faillo and Ottone2011; Sacconi and Faillo, Reference Sacconi and Faillo2010).

Now, one may ask whether the eventual agreement about distributive justice requires the veil of ignorance procedure. May it not be derived through a procedure under full information? Such a test could be done, but it would concern a different phenomenon, or alternatively its results would have an unclear interpretation.

Consider first bargaining under full knowledge. In this case results would be affected by the disagreement option (exit option) and the bargaining options (i.e. the shape of the bargaining frontier representing possible agreements). Assuming that the disagreement option was null for both and the possibility of the agreement were symmetrical the outcome should be egalitarian (Harsasyi, Reference Harsasyi1977; Nash, Reference Nash1950). But this would reflect equality in the players' bargaining position, not their undertaking a normative impartial perspective. Assume on the contrary that the exit option was strongly asymmetrical. Players would be expected to consider their personal product as the concession limit; so they would accept nothing less. This leads to questions about bargaining game theory, which is not our focus here.

Now consider the case of a free discussion on principles of distribution in a state of complete information. It is certainly possible that some participants would claim some redress for the unlucky party on the basis of impartiality, fairness or sympathetic feelings. The reasons for the agreement would be all but impossible to disentangle. The interpretation of whatever results would be extremely uncertain. It would be utterly difficult to answer our research question since this would require to know whether the deliberating parties adopted a normative stand characterized by impartiality. Let us recall that the goal of the experiment is to test the motivational force and realism of an impartial agreement. The most parsimonious way to introduce an impartial bargaining procedure seemed to be the adoption of the ‘veil of ignorance’, as was used by Rawls, Harsanyi and other moral and political philosophers.

The article is organized as follows. In the next section (section 2) the theoretical framework for the experiment is laid out. A general characterization of the principle we hypothesized would be chosen ex ante is offered in this section. Section three is devoted to the experimental design and procedures. The fourth section justifies and describes operational hypotheses. Section five presents the results. The final section discusses the meaning of these results, describes its implications for institutional design, acknowledges the limitations of this study and suggests future research.

2. Impartial agreement and compliance: Theoretical background and experimental evidence

In this section, we set out to explain the theoretical basis for the operational hypotheses.

Since the experiment introduces a ‘veil of ignorance’ procedure ex-ante, we draw upon theories of distributive justice that use that method. Several principia and criteria for justice have been argued to derive from impartial choice or agreement –among them Harsanyi's maximization of average utility principle (Binmore, Reference Binmore1989; Harsanyi, Reference Harsanyi, Sen and Williams1982; Traub et al., Reference Traub, Seidl, Schmidt and Levati2005). However, liberal egalitarian principles (henceforth LE) occupy a prominent place (Binmore, Reference Binmore2005; Brock, Reference Brock1979; Dworkin, Reference Dworkin1981a, Reference Dworkin1981b; Gauthier, Reference Gauthier1986; Rawls, Reference Rawls1971; Roemer, Reference Roemer1986; Sen, Reference Sen2009). Our theoretical conjecture is that the ex-ante agreement would make subjects converge on LE. In a hypothetical impartial agreement there is no reasonable basis for assigning people different levels of basic resources or rights, but it may be justified that people are rewarded according to their merit or contribution to common endeavors. This is an incomplete characterization of LE, but it suffices to explain our predictions regarding the distribution rule chosen ex-ante.

This characterization views LE as a twofold principle: a principle of equality (in resources) and a principle of reward related to contribution.Footnote ¹ This twofold principle implies that, when the starting point is not equal, LE may require a redistribution of what immediately derives from personal work. This is the formulation of the principle that will be adopted:

Liberal Egalitarian Redress Rule: if voluntary contributions to the production of a common output are made by means of arbitrarily allocated endowments, the difference in the outputs that agents contribute should not translate into an identical difference in the final distribution; on the contrary, the differential outputs obtained from differential endowments should be distributed equally.

The rationale for this formulation will become clear after the description of the experiment. At this point, it is important to stress that even this simplified LE principle requires a complex cognitive operation. People may be expected to agree on equal shares; or on simpler entitlement rules. Under this light, the first question posed above turns into whether people –in a suitably fair position– are capable of agreeing on a simplified LE principle of distribution that redresses arbitrary inequalities in productive means.

Let's move now to the problem of compliance. In a context without external enforcement, in which the agreement must be hold up through the subjects' voluntary compliance, once the veil is lifted, agents may wish to change their ex-ante choice. Hence our second question: Would ordinary agents, in particular those who have worked from an advantaged position, stick to the rule of distribution they chose behind a veil of ignorance? We ask this question in the most radical way. The interaction we design virtually invites agents to be self-serving. But the subjects will have just agreed –or so we expect– that LE distribution rule should be applied. This is about whether it is realistic to assume a motivation to comply ex-post with a rule that is seen as justified ex-ante.

Both mainstream economics and new institutional economics would anticipate a negative answer to these two questions. The fictitious agents of armchair philosophers may well agree on LE, but ordinary people in a lab would be expected to focus on simpler distribution rules. Second, maximizing individual payoff is the dominant move in the game played ex-post. A self-interested-with astuteness agent will exploit the opportunity to circumvent the ex-ante agreement and will defect. However, if Rawls's conception of a sense of justice and the theory of conformity preferences (see section 4 below) hold, they would account for positive answers to these questions.

It is not the first time that the twofold element in LE principles has been explored in experimental economics (Konow, Reference Konow2000, Reference Konow2001, Reference Konow2005). Cappelen et al. (Reference Cappelen, Sørensen and Tungodden2010), Cappelen et al. (Reference Cappelen, Moene, Sørensen and Tungodden2014) and Mollerstrom et al. (Reference Mollerstrom, Reme and Sørensen2015) present evidence that people can distinguish legitimate entitlements: people tend to justify the appropriation of what is in control of the agents, while they tend to be egalitarian about what is not.

An important strand of related experimental literature has taken up Rawls's second principle, which represents the liberal component in liberal egalitarianism (Brickman, Reference Brickman1977; Frohlich et al., Reference Frohlich, Oppenheimer and Eavey1987; Frohlich and Oppenheimer, Reference Frohlich and Oppenheimer1990, Reference Frohlich and Oppenheimer1992; Jackson and Hill, Reference Jackson and Hill1995; Michelbach et al., Reference Michelbach, Scott, Matland and Bornstein2003; Yaari and Bar-Hillel, Reference Yaari and Bar-Hillel1984). Also, for the first part of our design, experiments have been conducted about the effects of the choice behind the veil of ignorance on stated preferences for redistribution (e.g. Becchetti et al., Reference Becchetti, Degli Antoni, Ottone and Solferino2018; Schildberg-Hörisch, Reference Schildberg-Hörisch2010).

However, no study (except Sacconi and Faillo, Reference Sacconi and Faillo2010, and Faillo et al., Reference Faillo, Ottone and Sacconi2015) has considered the motivational problem of ex-post compliance with a principle chosen behind the veil.

The novelty of our experiment is that subjects are asked not so much to make a judgment about possible distributions, but actually to opt for a division rule and then face the choice, affecting their own income, of whether to implement or ignore it.

3. Experimental design and procedures

The experiment had three treatments labeled ‘Noveil’, ‘Bargaining’ and ‘Chat’. In all treatments, subjects were matched in pairs and asked to perform a task; one subject was randomly given 6 minutes and the other 10 minutes to perform the task; this variable instantiates the random allocation of production means in the experiment. Subjects generated an amount of money that depended on the output of the task. At the end of the task, each subject was asked how to divide the total produced by the pair. They could choose whatever division by opting for a percentage to be assigned to each member of the pair. Moreover, in order to provide explicit representation to distributions associated with principles of justice discussed in the literature, we identify five ‘division rules’ – described below – which may be selected by subjects. Once the subjects decided, one of the two members was randomly selected and her choice implemented.

Henceforth, we will name the decision taken at the end of the task as ‘ex-post choice’ to distinguish it from the former or ‘ex-ante choice’, which is material only to the Bargaining and Chat treatments. In these treatments, before performing the task and before knowing who would have 6 or 10 minutes to perform it, the members of each pair had to agree on one of the five-division rules. We refer to this phase as the ‘ex-ante agreement’. For the sake of comparability, we will also refer to the division choice as the ‘ex-post choice’ in the Noveil treatment, even if in the Noveil there was no ‘ex-ante agreement.’ Subjects were aware of all of the phases of the experiment from the beginning, before they made their first choice.Footnote ²

4. Hypotheses

We assume that making an agreement under the veil of ignorance would elicit a preference for the LE redress principle.Footnote ⁶ It is also assumed that the empirical suppositions behind theories for LE – as exemplified by the Rawlsian postulate of a sense of justice and the theory of conformity preference (Checchini Manara and Sacconi, Reference Cecchini Manara and Sacconi2019; Grimalda and Sacconi, Reference Grimalda and Sacconi2005; Sacconi, Reference Sacconi2007, Reference Sacconi, Sacconi and Degli Antoni2011b, Reference Sacconi, Sacconi, Blair, Freeman and Vercelli2011a; Sacconi and Faillo, Reference Sacconi and Faillo2010; Sacconi and Grimalda, Reference Sacconi, Grimalda, Porta and Bruni2007) – are correct. According to the conformity preference theory, what counts in engendering preferences for conformity is (i) participation in the impartial agreement, and (ii) that the agreement elicits the mental model of an agent who –having agreed– simply intends to carry out the agreed action and, by default, believes that the other agreeing party will also comply.

LE is not the most symmetrical or simple rule. Nevertheless, it is the focal rule in a moral sense. Self-interest is canceled under the veil of ignorance and therefore salience must be found in what results from impartial reasoning. Rule 4 (the LE redress rule) is the rule that requires less justification, given an impartial standpoint: it neutralizes unjustified inequality. But it does not require that production from an eventually harder-working party be shared. The extra time does not ground any claim; performance, within the limits of equal time, may. Ideally, time (endowment) should be equal if the game is to be fair. But since the subjects are aware that the distribution will be unequal, the best they can do to rectify the random inequality is to apply some redress mechanism.

The sort of normative reasoning and agreement induced by the veil of ignorance has the power to turn the subsequent interaction into a moralized one. We suggest that people will tend to see the distributive problem as a decision situation in which the rational thing to do is to comply with the justified principle.

This conjecture, in the context of our design, rests on the assumption that agents possess what Rawls called a ‘sense of justice’ (Rawls, Reference Rawls1971, ch. VIII). They are ready to choose according to agreed principles of justice, even if this is personally costly, provided there is a common expectation that others will do the same. Ex-ante agreement, in conjunction with the formation of mutual expectations of compliance, entails an attitude of reciprocal compliance. If this assumption holds, our subjects should comply with their agreed choice.

As a combination of Hypothesis 1 and Hypothesis 2 we put forward our third hypothesis:

Even if anonymity is preserved, the mere fact that there is a chat open for several minutes, in which the subjects may use natural language to write down their thoughts about the situation and to exchange considerations about the meaning of the different rules, makes a difference. This form of reaching an agreement makes the normative nature of the situation even clearer. In addition, the chat exchange reduces the social distanceFootnote ⁷ and may increase the disposition not to take advantage of one's partner.

We draw hypothesis 2 from the idea of a ‘sense of justice’, and from the formalization of this idea through the theory of conformity preferences. According to this theory, a preference for conformity is activated by means of an impartial agreement under the condition that the parties hold first (what agents believe others will do) and second-order (what agents believe others believe they will do) positive beliefs about conformity (Faillo et al., Reference Faillo, Ottone and Sacconi2015; Grimalda and Sacconi, Reference Grimalda and Sacconi2005; Sacconi, Reference Sacconi2007; Sacconi and Faillo, Reference Sacconi and Faillo2010). Therefore, if we predict a high degree of compliance, we must also predict the corresponding first and second-order beliefs aligned with conformity.

5. Meaning, limitations and implications for effective institution design

This paper presents an economic experiment based on introducing a procedure for non-binding agreement in ignorance before the playing of a dictator with taking where the amount to be distributed is produced by the players through an activity they perform with unequal resources. Since players are free to claim as much as they want, and the agreement is non-binding, opportunism seems to be the conventional-knowledge prediction (Williamson, Reference Williamson1975, Reference Williamson1985). In fact, the control treatment without the agreement procedure showed results in line with the literature on dictator with taking (Bardsley, Reference Bardsley2008; Cappelen et al., Reference Cappelen, Nielsen, Sørensen, Tungodden and Tyran2013; Faillo et al., Reference Faillo, Rizzolli and Tontrup2019; Korenok et al., Reference Korenok, Millner and Razzolini2013; List, Reference List2007). However, distributive decisions in treatments with the ex-ante agreement procedure widely depart from standard dictator games. A significant number of players adhere to the rule they voluntarily chose; and the chosen rule is for the most part a redress rule that we identify with liberal-egalitarian justice. This is an addition to the extant literature on distributive principles inspired by Rawls's second principle of justice, generally focused on the choice of a distributive scheme, rather than the choice of a distributive principle itself, and neglecting the motivational component (Frohlich et al., Reference Frohlich, Oppenheimer and Eavey1987; Frohlich and Oppenheimer, Reference Frohlich and Oppenheimer1990; Reference Frohlich and Oppenheimer1992; Jackson and Hill, Reference Jackson and Hill1995; Lissowski et al., Reference Lissowski, Tyszka and Okrasa1991; Michelbach et al., Reference Michelbach, Scott, Matland and Bornstein2003; Yaari and Bar-Hillel, Reference Yaari and Bar-Hillel1984). In our case, for the first time subjects distribute the income they generate through a real-effort task. The experiment shows a general tendency to agree on a re-dress principle and a strong motivational effect of that agreement.

Furthermore, our results show that the ex-ante impartial procedure for agreement does change voluntary individual behavior in an experimental context that captures key elements of productive organizations. Our claim is that this result is relevant for institutional economics insofar as it effectively challenges the assumption of opportunism in firms (Grossman and Hart, Reference Grossman and Hart1986; Hansmann, Reference Hansmann1988; Hart and Moore, Reference Hart and Moore1990; Williamson, Reference Williamson1975).

Most experimental subjects correctly analyzed arbitrary endowment inequality as injustice, accepted the rationality of redress, and then proceeded to act upon this principle. Their action in compliance with the redress rule is explained both by the fact that they needed to reach an ex-ante agreement, and by the fact that they did believe that the agreement was authoritative for the two parties, as is showed by their predominant mutual beliefs.

The experiment focuses on three simple questions inspired by the idea that institutional design based on principles of justice may not be unrealistically demanding. The conclusion is that it is not. Ordinary people are persuaded by normative criteria when they reason from an impartial situation. Furthermore, they are ready to act upon agreed fair rules, even when they focus on the individual decision of complying or not with the agreed criteria, a perspective that could activate the frame of a non-cooperative game. The ex-ante agreement seems to elicit a framing that activates the disposition to conform when other participants are taken to be participating in common action. Our study is a first step in buttressing an important set of normative theories which are usually criticized for being too removed from reality. Our conclusion is that, right or wrong, they are assuming nothing that cannot be assumed of most ordinary people.

Moreover, as shown by the data from the Chat treatment, the compliance effect is stronger if the agreement involved natural-language deliberation. This finding invites further exploration about the cognitive and motivational role of explicit agreement; in particular, agreement reached through participatory natural-language deliberation, as opposed to a consent-based agreement (Hielscher et al., Reference Hielscher, Beckmann and Pies2015).

At this point, one may ask how we can derive normative suggestions for institutional design from an experiment which should have mere descriptive or explanatory value. Are we falling in the famous naturalistic fallacy? Note that any suggestions are derived from the fact that the relevant normative principles are accepted by the parties themselves through their agreement. We suggest that if you want to obtain – in a controlled environment like a lab – a behavior consistent with a policy of redress of an unjust gain, you have just to devise rules of collective choice that allow agents to impartially decide by themselves the principles of distribution. No strong assumptions about agent's motivations or specific incentives are required. The principle will be de facto complied with by means of individual choices based on reciprocal expectations, in a way that may be understood as a stable institution in Aoki's equilibrium-sense (Aoki, Reference Aoki2001, Reference Aoki2007).

What we learn from our result is that in case the conditions created in our experimental settings can be approached in institution design, de facto adhesion to the LE principle of justice is not a ‘mirage’.Footnote ¹⁹ It may seem a long shot from actually implementing justice in productive institutions. This contribution should be carefully developed in order to explore how to implement the idea of an ex ante impartial agreement. This is beyond the scope of this article. However, let's note that the message is partly similar to Ostrom et al., (Reference Ostrom, Walker and Gardner1992). And our results go even beyond Ostrom, Walker and Gardner: first we focus on distributive justice of a common output, not efficiency in the consumption of a CPR. Second, this is not just pre-play communication but impartial and impersonal procedures. This extends the scope of ex-ante agreements beyond the limits of small communities. Third, the explanation is based on the explicit hypothesis that utility functions are shaped according to a ‘sense of justice’. The result is an institution that does not give up the equilibrium property, but consists in a self-sustaining equilibrium based on conformity preferences.