1 Introduction

Coordination failures are some of the most important sources of economic inefficiencies. Coordination games have been used extensively to study both theoretically and experimentally the sources and remedies of coordination failures. As observed by Crawford et al. (Reference Crawford, Gneezy and Rottenstreich2008), one instance where severe coordination failures take place is when coordination entails asymmetric payoffs for the players involved. In this paper, we consider a class of 2 × 2 coordination games with highly asymmetric payoffs between the players, and examine through laboratory experiments if ex post voluntary transfer of payoffs helps eliminate coordination failures and increase efficient coordination.

Formally, an inequality game is a 2 × 2 coordination game with two Nash equilibria (NE) (X, X) and (Y, Y). Player 1 earns a strictly higher payoff than player 2 at every action profile except at (Y, Y), where they earn the same payoff. However, the sum of payoffs at (Y, Y) is substantially lower than that at (X, X), implying a tension between efficiency and equity. The inequality games are further classified into ComMon-interest (CM) inequality games in which both players’ payoffs are higher at (X, X) than at (Y, Y), and ConFlicting-interest (CF) inequality games in which player 1’s payoff is higher but player 2’s payoff is lower, at (X, X) than at (Y, Y). Examples of CM and CF inequality games are presented in Table 1. The inequality games are also parametrized by the degree of inequality between the two players’ payoffs.

Table 1 Inequality games

	CM					CF
	X		Y			X		Y
X	440,	110	60,	50	X	320,	80	60,	20
Y	380,	60	100,	100	Y	260,	60	100,	100

(X, X) efficient coordination; (Y, Y) equitable coordination

The redistribution scheme we propose allows both players to voluntarily transfer their payoffs to the other player after the play of the inequality game. Although such a scheme will have no impact on the outcome of the game under self-interested preferences, our main objective is to analyze its functioning in a laboratory where subjects’ motivation may come from other sources than self-interest.

The efficiency-equity trade-off between the two NE in the inequality games can be a fundamental source of coordination failures. The players playing CM and CF games also can have sufficiently different motivations when choosing their actions. In CM games, coordination on the Pareto efficient profile (X, X) will result unless the players are, or expect the other player to be, sufficiently inequality averse. In CF games, on the other hand, coordination on (X, X) would be more difficult since it entails a material sacrifice by player 2 compared with coordination on (Y, Y). With ex post redistribution, this difference in the motivations between the CM and CF games can have a significant impact on the final outcome. In other words, when (X, X) is realized in the CM games, player 1 may interpret it as a result of player 2’s self-interested behavior, and may find little reason to reciprocate 2’s choice of X with payoff transfer to him. On the other hand, if (X, X) is realized in CF games, player 1 may interpret it as resulting from 2’s self-sacrifice to achieve an outcome which benefits 1. Player 1 may hence have incentive to reciprocate this with payoff transfer. Expecting this, however, player 2 may strategically choose X in CF to his own benefit.

In our experiments, each subject is randomly assigned the role of either player 1 or player 2, and is randomly and anonymously matched with a subject who is assigned the other role. The experiment consists of three parts with the subject role fixed throughout. In the first part, we have a half of the subjects in each role make a dictator decision over the action profiles of each inequality game. In the second part, the subjects play a series of inequality games in a standard way. In the third part, they play the inequality games under the redistribution scheme. Our design choice to have the same set of subjects play the games with no redistribution first and then with redistribution next, and provide in the instructions detailed information on how the payoffs are determined by the actions, is motivated by the importance of having the subjects understand the externalities involved in their decision making in the inequality games and the consequences of possible coordination failures. The within-subject design also allows us to associate the heterogeneity in the subjects’ behavior with their preferences and beliefs about the behavior of the other player.

Our results show that the redistribution scheme induces significantly positive transfer by player 1 in both CM and CF games. Positive transfer takes place almost exclusively when player 2 chooses action X which corresponds to the efficient NE preferred by player 1. The size and frequency of transfer is higher in CF games than in CM games, and increasing inequality increases the size of transfer but not the frequency of positive transfer. Comparison of the results with and without the redistribution scheme shows that the scheme induces the efficient NE (X, X) strongly significantly in CF games, but only weakly in CM games. We also find that the scheme increases the sum of the two players’ payoffs significantly in CF games but only insignificantly in CM games, and significantly improves equity as measured by the payoff ratio between the two players in both CF and CM games.

Since the introduction of ex post payoff redistribution has no impact on the behavior of self-interested individuals, the observed increase in efficient coordination and positive transfer imply the presence of distributive social preferences and/or reciprocity. We attempt to identify the source of these effects based on some key observations. In particular, we remark that positive transfer by player 1 to player 2 takes place almost exclusively following 2’s choice of X. This suggests that player 1 reciprocates player 2’s action choice that benefits player 1. Furthermore, the observed difference between CM and CF games suggests that player 1 perceives the level of kindness entailed in 2’s choice of X differently in the two games. Specifically, the choice of X by player 2 can result from self-interest in CM, but entails a sacrifice in CF. We suppose that player 1’s reciprocity is strengthened by the presence of self-sacrifice by player 2, and postulate a psychological utility function that explicitly accounts for sacrifice. Taking advantage of the within-subject design, we also attempt to identify the subjects’ motivations by examining their behavior in different tasks. In particular, we find that the increased choice of action X by the role 2 subjects in the redistribution scheme is likely motivated by self-interest: They choose X in anticipation of the choice of X and positive transfer by role 1.

The key contributions of the present paper are summarized as follows. First, we show that social preferences can have a significant impact on the play of coordination games. The literature on social preferences has largely ignored coordination games perhaps because of the intuitive perception that social preferences will only contribute to an increase in coordination. We present a formal framework to test this intuition and identify the working of social preferences in the presence of a tension between equality and efficiency. Second and relatedly, we identify self-sacrifice as a critical trigger of positive reciprocity. Third, we find that individuals respond differently to increase in inequality, and that the increase in efficient coordination in the presence of redistribution opportunities is brought about by those who are intrinsically concerned about inequality and/or the own payoffs. Finally, our methodological contribution lies in the formulation of a class of coordination games with payoff asymmetry between the two players. Specifically, this class usefully nests both common and conflicting interests games with varying degrees of inequality and allows us to study the effects of these elements while controlling for the confounding effect of risk dominance.

The paper is organized as follows. The next section discusses the related literature. The inequality game and the redistribution scheme are described in Sect. 3, and testable implications of social preferences are presented in Sect. 4. Section 5 describes the experimental design, and Sect. 6 presents the analysis. The heterogeneous motives behind the observed action choices and transfer decisions are discussed in Sect. 7. We conclude with a discussion in Sect. 8.

2 Related literature

Reciprocity-based mechanisms originate in the literature on public good games. Reciprocity in the form of a punishment or disapproval of other players is the focus of early study by Fehr and Gächter (Reference Fehr and Gächter2000) and Masclet et al. (Reference Masclet, Noussair, Tucker and Villeval2003).Footnote ¹ While reciprocity is at the core of our analysis, asymmetry between the players in our model offers a significantly different perspective from that in the symmetric environment in the early literature.

The public good literature also offers extensive research on the possible distortion of behavior associated with inequality among the players: Asymmetry is introduced either in the level of individual return (MPCR - marginal per capita return), or in the level of initial endowment (income) of each individual. The findings are largely inconclusive.Footnote ² Combining asymmetry with redistribution in public good games, Dekel et al. (Reference Dekel, Fischer and Zultan2017) and Gangadharan et al. (Reference Gangadharan, Nikiforakis and Villeval2017) present analysis most closely related to the present paper. When players with positive and negative MPCR’s interact, and redistribution takes the form of either a punishment or reward, Dekel et al. (Reference Dekel, Fischer and Zultan2017) observe that communication coupled with a reward increases contribution substantially. When players may ex post reward the others, Gangadharan et al. (Reference Gangadharan, Nikiforakis and Villeval2017) also find a positive impact of communication on both earnings and contribution, but show that its impact is significantly weakened in the presence of heterogeneity in MPCR.Footnote ³ While the present model shares many features with the papers on public good games with heterogeneity and ex post redistribution, its use of coordination games highlights the role of reciprocity more clearly. Specifically, it is intuitive that player 2’s choice of X corresponding to the efficient coordination is a favor given to player 1, and that payoff transfer from 1 to 2 is a direct way of returning the favor.Footnote ^4, Footnote ⁵

Positive reciprocity is studied most intensively in the trust games. Although several authors have studied the interplay of inequality and reciprocity in the trust games, our framework is different in some critical dimensions.Footnote ⁶ First, the sequential nature of a trust game presents no coordination issue which is the source of strategic uncertainty and a central focus of our study. Second, while a sender’s action of trust in a trust game is a clear message requesting reciprocation, the simultaneous action choices in an inequality game are strategic and hence much less straightforward to interpret. Third, players in a trust game have inherently asymmetric roles as a sender and receiver, whereas the players of an inequality game are symmetric except for their payoffs. Fourth, the trust games do not allow us to study the effect of self-sacrifice as is done here.

Turning to the extensive literature on coordination games experiments, the primary focus is on the comparison between payoff dominance and risk dominance as the effective predictor of the outcome of play.Footnote ⁷ The literature on coordination games also investigates ways to eliminate coordination failures, and finds mixed evidence on the effectiveness of forward induction and correlated equilibrium recommendations.Footnote ⁸ Importantly, our analysis controls for the effect of risk-dominance by using games that have a constant level of risk dominance. Furthermore, while forward induction or correlated equilibrium recommendations are based on self-regarding preferences, the working of the redistribution mechanism hinges on social preferences.

3 Models of inequality and redistribution

3.1 Inequality games

Formally, an inequality game G is a 2 × 2 coordination game: Each player i chooses his action $x_i$ from the set $\{0,1\}$ , and their payoff functions are given by

(1) $\begin{array}{c}\begin{array}{cc}& g_1\left(x\right)=a(1-x_1)(1-x_2)+b{x}_1+c_1{x}_2,\\ & g_2\left(x\right)=a(1-x_1)(1-x_2)+b{x}_2+c_2{x}_1.\end{array}\end{array}$

For the interpretation of these payoff functions, suppose that each player i chooses whether to allocate his resource to either their private activity ( $x_i=1$ ) or an activity toward a public project ( $x_i=0$ ). The private activity generates positive externalities to the other player, whereas the public project results in a success if and only if both players allocate their resources to it. The successful public project is worth a to each player, whereas player i’s private activity is worth b to himself and worth $c_j$ to the other player j. When both players engage in private activities, the utility of each player is simply the sum of the benefits from his and the other player’s activities.Footnote ⁹ We suppose that the externality benefit that 2’s private activity creates for 1 is larger than the externality benefit that 1’s private activity creates for 2:

$\begin{array}{c}a>b>0\text{and}{c}_1>c_2>0.\end{array}$

Note that the second condition is the only source of inequality between the two players. Writing X for $x_i=1$ , and Y for $x_i=0$ , we can depict the payoff table as in Table 2.Footnote ¹⁰

Table 2 Inequality game: $c_1>c_2$

P1 $\backslash$ P2	X		Y
X	$b+c_1$	$b+c_2$	b	$c_2$
Y	$c_1$	b	a	a

Since $a>b>0$ , both (X, X) and (Y, Y) are pure NE. We also assume (i) $c_1+c_2>2(a-b)$ $\iff$ (X, X) uniquely maximizes the sum of payoffs, (ii) $c_1>b>c_2$ $\iff$ $g_1\left(x\right)>g_2\left(x\right)$ for $x\ne (Y,Y)$ , and (iii) $2b>a$ $\iff$ (X, X) is risk dominant. It follows from (ii) that (Y, Y) is the only profile in which the two players earn the same payoff. We further focus on the following subclasses of inequality games: An inequality game has ComMon-interest (CM) if $b+c_1>b+c_2>a$ , and has ConFlicting-interest (CF) if $b+c_1>a>b+c_2$ . In other words, if an inequality game has CM, then both players 1 and 2 prefer the NE (X, X) to the NE (Y, Y) (in terms of material payoffs), whereas if it has CF, then player 1 prefers (X, X) to (Y, Y) and player 2 prefers (Y, Y) to (X, X).

In our experiments, we set $a=100$ and $b=60$ and choose six combinations of $c_1$ and $c_2$ as in Table 3. This results in three CM inequality games denoted CM2, CM4 and CM6, and three CF inequality games denoted CF2, CF4 and CF6. The suffix represents the degree of inequality between the players and is equal to the payoff ratio at (X, X):

$\begin{array}{c}\frac{g_1(X,X)}{g_2(X,X)}=\frac{b+c_1}{b+c_2}=\text{k in CF}k\text{and CM}k.\end{array}$

Since $g_1(X,X)-g_2(X,X)=c_1-c_2$ , within each class of games, the larger is k, the larger is the payoff difference at (X, X).Footnote ¹¹ The resulting payoff tables are depicted in Tables 4 and 5. Note that all CM games are the same in terms of player 2’s payoffs, and so are all CF games. Furthermore, since a and b are held constant in all games, so is the risk dominance level of (X, X).

Table 3 Parameter specifications

	CF2	CF4	CF6	CM2	CM4	CM6
$c_1$	100	260	420	160	380	600
$c_2$	20	20	20	50	50	50

Table 4 CM inequality games

(a) CM2					(b) CM4					(c) CM6
	X		Y			X		Y			X		Y
X	220,	110	60,	50	X	440,	110	60,	50	X	660,	110	60,	50
Y	160,	60	100,	100	Y	380,	60	100,	100	Y	600,	60	100,	100

Table 5 CF inequality games

(a) CF2					(b) CF4					(c) CF6
	X		Y			X		Y			X		Y
X	160,	80	60,	20	X	320,	80	60,	20	X	480,	80	60,	20
Y	100,	60	100,	100	Y	260,	60	100,	100	Y	420,	60	100,	100

3.2 Voluntary redistribution

Let $u_i$ denote player i’s final material payoff after the possible redistribution of their payoffs. Task 1 (T1) is the baseline scheme in which no redistribution takes place after the play of the inequality game G. In T1, the players’ final payoffs equal their payoffs from G: $u_i=g_i$ . Task 2 (T2), on the other hand, is the redistribution scheme in which the players may give part or all of their payoffs to the other player after publicly observing the outcome of the inequality game. If player i gives $t_i\in [0,g_i]$ payoff points to player j ( $i\ne j$ ), then i’s final (material) payoff is given by ( $t=(t_1,t_2)$ )

(2) $\begin{array}{c}{u}_i(x,t)=g_i\left(x\right)-t_i+t_j\text{for}i=1,2,j\ne i.\end{array}$

Task 0 (T0) is the dictator scheme in which the final allocation is determined by only one of the players. Specifically, one player in each pair makes a choice among four payoff pairs that correspond to the four cells of the payoff table.

4 Equilibrium under reciprocity

We say that the players have reciprocity preferences if they reward the other player through positive transfer for the favor given to them in the play of the inequality game. Specifically, we suppose that the reciprocity preferences are given by

(3) $\begin{array}{c}{U}_i(x,t)=u_i(x,t)+{\gamma }_i\left(x\right)log{u}_j(x,t),\end{array}$

where for $0<{\mu }_i\le {\nu }_i$ ( $i=1$ , 2),

$\begin{array}{c}{\gamma }_i\left(x\right)=\left(\begin{array}{cc}0& \text{if}{g}_i\left(x\right)\le a,\\ {\mu }_i& \text{if}{g}_i\left(x\right)>a\text{and}{g}_j\left(x\right)\ge a,\\ {\nu }_i& \text{if}{g}_i\left(x\right)>a\text{and}{g}_j\left(x\right)<a.\end{array}\right)\end{array}$

The second term of $U_i$ represents player i’s reciprocity concerns, and ${\gamma }_i\left(x\right)$ is the reciprocity weight that measures how kind j is toward i through his action choice in G. Specifically, player i takes $g_i(Y,Y)=a$ as the reference point, and considers j to be kind when j’s alternative action choice $x_j=X$ raises i’s payoff above a. That is, player i places a strictly positive weight ${\gamma }_i\left(x\right)$ on j’s material payoff if and only if $g_i\left(x\right)>a$ .Footnote ¹² If j’s choice of X not only raises i’s payoff above a but also lowers j’s own payoff from a, then i regards it as the sacrifice made by j in raising i’s payoff, and rewards j even more strongly by placing a higher weight on j’s material payoff. In the CM inequality games, for example, ${\gamma }_1(X,X)={\mu }_1$ and ${\gamma }_2(X,X)={\mu }_2$ since both players are better off at (X, X) than at (Y, Y). On the other hand, in the CF inequality games, ${\gamma }_1(X,X)={\nu }_1$ and ${\gamma }_2(X,X)=0$ since player 1 is better off and player 2 is worse off at (X, X) than at (Y, Y).Footnote ¹³ The following proposition holds for the SPE of T2 under reciprocal preferences.

Proposition 1

(SPE transfer under reciprocity) Suppose that the players’ preferences are given by (3). $\sigma$ is an SPE transfer in T2 if and only if for $x\in {\{X,Y\}}^2$ , $i=1$ , 2, $j\ne i$ ,

(4) $\begin{array}{c}{\sigma }_i\left(x\right)=\left(\begin{array}{cc}max\{{\gamma }_i\left(x\right)-g_j\left(x\right),0\}& \text{if}{\gamma }_1\left(x\right)+{\gamma }_2\left(x\right)<g_1\left(x\right)+g_2\left(x\right),\\ min\{{\gamma }_i\left(x\right),g_i\left(x\right)\}& \text{if}{\gamma }_1\left(x\right)+{\gamma }_2\left(x\right)>g_1\left(x\right)+g_2\left(x\right).\end{array}\right)\end{array}$

The SPE transfer $({\sigma }_1\left(x\right),{\sigma }_2\left(x\right))\equiv (t_1,t_2)$ in (4) is illustrated in Fig. 1. In what follows, we restrict attention to the case where the reciprocity weights ${\gamma }_i$ are not too large so that neither player transfers his entire payoff $g_i$ .Footnote ¹⁴ When the parameters are in such a range, Fig. 1 shows that at most one player makes a positive transfer, and which player does so depends on the relative magnitude of the reciprocity weights. In particular, as long as those weights are similar in size, it is player 1 who makes positive transfer given that his payoff $g_1$ is much larger than 2’s payoff $g_2$ . Our hypotheses under the reciprocity preferences (3) are as follows.Footnote ¹⁵

Fig. 1 SPE transfer $t=(t_1,t_2)$ as a function of the reciprocity weights $({\gamma }_1,{\gamma }_2)$

Hypotheses Footnote ¹a and Footnote ¹b are our main hypotheses. The reciprocity preferences as defined in (3) generate behavior different from self-interest only in T2, and no difference is expected either in T0 or T1. As competing hypotheses, we consider the distributional social preferences as follows. The players have inefficiency aversion (IEA) preferences if they are concerned about the efficiency of an outcome as measured by the sum of their material payoffs. Specifically, we suppose that

(5) $\begin{array}{c}{U}_i(x,t)=u_i(x,t)+{\kappa }_i\{u_1(x,t)+u_2(x,t)\}\text{for}i=1,2,\end{array}$

where ${\kappa }_i$ represents the degree of the inefficiency concerns relative to the own material payoff. The players have inequality aversion (IQA) preferences if they dislike inequality in their material payoffs. Specifically, we suppose that

(6) $\begin{array}{c}{U}_i(x,t)=u_i(x,t)-{\lambda }_i|u_i(x,t)-u_j(x,t)|\text{for}i=1,2,j\ne i,\end{array}$

where ${\lambda }_i>0$ represents the degree of the inequality concerns relative to the own material payoff.Footnote ¹⁶ The implications of these preferences are as follows.Footnote ¹⁷

5 Experimental design

The experiments were conducted at the Experimental Economics Laboratory at the ISER, Osaka University, with the subjects recruited from undergraduate and graduate students of Osaka University of various majors. There were six sessions with a total of 124 subjects (four sessions of 20 subjects and two sessions of 22 subjects). No subject attended more than one session. The subjects in each session were divided randomly into two groups of the same size with the first group of subjects assigned the role of player 1, and the second group assigned the role of player 2. The player roles stay the same throughout the session. The role assignment is done privately on the PC screen in front of each subject. The instruction presents the payoff formula (1), and provides its illustration by means of numerical examples and graphs.Footnote ¹⁹, Footnote ²⁰ The inclusion of the payoff formula is intended to help the subjects understand the source of inequality between the two roles, and also the externalities involved in their decision making. The payoff matrix is shown also on the PC screen in front of each subject. At the end of each session, the earning of a subject is computed from the sum of his/her payoff points during the session with the conversion rate of 1 payoff point to JPY1.3.Footnote ²¹ The average earnings are JPY9946.1 for the role 1 subjects and JPY3122.8 for the role 2 subjects.Footnote ²² The subjects were also given a record sheet in which they describe their action and transfer choices as well as the reason behind those choices.

The experiments adopt the within-subject design and every session is divided into three task blocks that correspond to T0–T2 described in the previous section. Each task block in turn consists of six rounds that correspond to the six inequality games CF2-CF6 and CM2-CM6. In all four sessions, the ordering of the task blocks is fixed and given by

$\begin{array}{c}\text{T0}\to \text{T1}\to \text{T2.}\end{array}$

As mentioned in the Introduction, the fixed task order was adopted so that the subjects would become fully aware of the externalities involved in their decision making through the standard play of the inequality games in T1.Footnote ²³ The six games appear in random order in the six rounds of each task block. In T0, a half of the role 1 subjects and a half of the role 2 subjects are randomly chosen to make a choice.Footnote ²⁴ After every round, each subject observes his and the other player’s action choices on their PC screen, and then is anonymously rematched to another subject of the opposite role in the stranger format. Since ten or eleven pairs are formed in each session consisting of 18 rounds, the probability that the same pair of subjects are matched is positive. One concern may be that it generates stronger incentive to coordinate on the efficient action profile than in the one-shot environment. The literature on repeated prisoners’ dilemma however finds that cooperation rates are not high under random matching (Duffy and Ochs Reference Duffy and Ochs2009). Furthermore, since the same format is used for T1 and T2, the marginal impact of such an incentive on the effectiveness of T2, if any, would be smaller.Footnote ²⁵

6 Analysis

6.1 Dictator decisions

Fig. 2 Outcome distribution in T0

We begin by examining the outcome of the dictator decision task (T0). Figure 2 shows the frequency of each of four choices for CM and CF games, where $A=(X,X)$ , $B=(X,Y)$ , $C=(Y,X)$ , and $D=(Y,Y)$ . As seen, the subjects’ choices are almost entirely limited to (X, X) and (Y, Y), which are NE of the game.Footnote ²⁶ Additionally, the role 1 subjects choose (X, X) more than 94% of the time, whereas the choice of the role 2 subjects is approximately reversed depending on whether the game is CM or CF. In CM, they choose (X, X) more than 90% of the time, whereas in most cases of CF, they choose (Y, Y) 80% of the time.Footnote ²⁷ The inequality dummy k is mostly insignificant in both CM and CF.Footnote ²⁸

Role 1’s choice of (X, X) is consistent with self-interest and IEA, whereas role 2’s choice of (X, X) in CM and (Y, Y) in CF is consistent with self-interest and IQA.

Observation 1

(Dictator decision) The behavior of the role 1 subjects in T0 is mostly consistent with self-interest and IEA. The behavior of the role 2 subjects in T0 is mostly consistent with self-interest and IQA. Footnote ²⁹

6.2 Action choice

Figure 3 shows the frequency of each action (X and Y) by each subject role. As seen, there is a significant difference in the subjects’ action choice in T1 and T2, and the difference is more prominent in CF: Going from CM-T1 to CM-T2, the choice of X increases by 6 percentage points for role 1 (90% $\to$ 96%) and by 4 percentage points for role 2 (90% $\to$ 94%). On the other hand, going from CF-T1 to CF-T2, the choice of X increases by 16 percentage points for role 1 (68% $\to$ 84%), and 10 percentage points for role 2 (73% $\to$ 83%). It also shows that both roles choose Y more often in CF than in CM. These observations are confirmed by the random effects logit regressions in Table 11 in Appendix A.1, where the dependent variable equals one if a subject chooses Y. Models (4) and (6) in Table 11, which include inequality dummies k ${}_4$ and k ${}_6$ , show that increasing inequality has different effects in CM and CF: While higher inequality overall has a positive impact on the choice of Y in CM, higher inequality has little to no impact in CF. In CM where the increasing inequality increases the choice of Y, this effect is independent of the subject role (model (5)). The subject role has no significant impact on the action choice in CM and CF (models (2) and (3)). This is in sharp contrast with our observation in CF-T0, where the dominant choice is $A=(X,X)$ for role 1 and $D=(Y,Y)$ for role 2.Footnote ³⁰ The observation on the action choice can be summarized as follows:

Fig. 3 Action choices in T1 and T2. ** and ***: significant difference at 5% and 1%, respectively, between the respective pair of distributions ( $\chi$ ). Shown in each column are the numbers of each action choice aggregated for k = 2, 4, and 6

Observation 2

(Action choice)

1. 1. In CF, T2 raises the choice of X compared with T1.

2. 2. Higher inequality increases the choice of Y in CM.

Observation Footnote ².1 supports our main reciprocity Hypothesis Footnote ¹a as well as the IQA Hypothesis Footnote ³a but not the IEA Hypothesis Footnote ²a. The effect of inequality in Observation Footnote ².2 on CM is also consistent with the IQA Hypothesis Footnote ³c, but not with the IEA Hypothesis Footnote ¹c or the reciprocity Hypothesis Footnote ²c.

6.3 Coordination

Table 6 Realization of action profiles

Action profile	CM				CF
	T0		T1	T2	T0		T1	T2
	Role 1	Role 2			Role 1	Role 2
(X, X)	94	83	151	167	93	16	89	130
(Y, Y)	2	6	2	0	2	73	14	5
(X, Y)	0	1	17	12	1	0	37	26
(Y, X)	0	0	16	7	0	1	46	25
p-value ( ${\chi }^2$ test):
T0=T1=T2	0.00	0.00			0.00	0.00
T1=T2			0.07				0.00
CM=CF		0.00	0.00	0.00

The three lines in the bottom report the p-values of the ${\chi }^2$ tests of the hypothesis that the distributions are the same for T0-T2 (first line), between T1 and T2 (second line), and between CM and CF (third line)

Table 6 describes the realized distribution of four action profiles in T0 through T2. It shows that the redistribution scheme induces efficient coordination particularly effectively in CF: Going from T1 to T2, the efficient coordination (X, X) increases by 9% percentage points (81% $\to$ 90%) in CM, but by 22 percentage points in CF (48% $\to$ 70%). Furthermore, the redistribution scheme also reduces coordination failures much more substantially in CF: Coordination failures (X, Y) and (Y, X) decrease by 8 percentage points in CM (18% $\to$ 10%), whereas they decrease by 18% percentage points in CF (45% $\to$ 27%). In fact, the difference in the distributions between T1 and T2 is strongly significant only in CF ( $p=0.00$ ) and only weakly so in CM ( $p=0.07$ ). The difference between CM and CF is strongly significant in T0, T1 and T2. These observations are again confirmed by logit regressions of action profiles in Table 12 in Appendix A.1, where the dependent variable is either the efficient coordination ( $1_{\left\{a=(X,X)\right\}}$ ), or the total coordination ( $1_{\left\{a=(X,X)or(Y,Y)\right\}}$ ).Footnote ³¹ As in the case of individual action choices, models (3)-(6) show that the impact of increasing inequality (i.e., signs of the inequality dummies k ${}_4$ and k ${}_6$ ) is qualitatively different between CM and CF: higher inequality reduces coordination in CM, but either increases it or has no effect in CF. We summarize our findings as follows:

Observation 3

(Coordination)

1. 1. In both CM and CF, T2 increases efficient coordination (X, X) and reduces both inefficient coordination (Y, Y) and coordination failures.

2. 2. In both T1 and T2, higher inequality decreases efficient and total coordination in CM, but has either positive or no effect on coordination in CF.

Observation Footnote ³.1 is our central finding that supports our main reciprocity hypothesis Footnote ¹a. It is also consistent with the IQA hypothesis Footnote ³a, but contradicts the IEA hypothesis Footnote ²a which would imply no difference between T1 and T2. On the other hand, the reciprocity hypothesis Footnote ¹c is not supported by the negative impact of high inequality on efficient coordination in CM in Observation Footnote ³. The negative impact is consistent with the IQA hypothesis Footnote ³c in the case of T1, but not with the IEA hypothesis Footnote ²c.

The observed increase in efficient coordination in T2 leads to improvement in efficiency as measured by the sum of the two players’ payoffs ( $g_1+g_2=u_1+u_2$ ). T2 raises the average total payoff by 4.7% in CM (490.65 in T1 $\Rightarrow$ 513.92 in T2, $p=0.28$ t-test), and by 12.8% in CF (301.51 in T1 $\Rightarrow$ 340.00 in T2, $p=0.03$ t-test).Footnote ³² In line with Observation Footnote ³.1, T2 has a more substantial impact on efficiency in CF than in CM. Further scrutiny of the subjects’ payoffs reveals interesting facts. Figure 5 in Appendix A.2 depicts the average final payoffs ( $u_i$ ) of each role in T1 and T2. While redistribution raises role 2’s payoff in both CM and CF ( $p<0.01$ in both CM and CF, t-test and Mann-Whitney test), no such effect is observed for role 1 (by either test). Tobit regression analysis in Table 13 in Appendix A.1 confirms that redistribution has a significantly positive impact only on role 2’s payoff. In summary, our finding suggests that role 1 transfers away any payoff gain from more efficient coordination achieved in T2.Footnote ³³

6.4 Transfer

Table 7 shows the average transfer and the number of occurrences of positive transfers after each action profile. As seen, a dominant share of positive transfer is made by role 1: In total, role 1 makes positive transfers in 31.2% of all occasions in CM (58 times out of 186 occasions), and 43.5% of all occasions in CF (81 times out of 186 occasions). Role 1’s average transfer is significantly positive in both CM and CF, implying that they are on average not self-interested. When aggregated over k, 94.8% and 84.0% of all positive transfers by role 1 are observed after the realization of (X, X) in CM and CF, respectively. Role 1’s average transfer amount is significantly higher conditional on (X, X) than conditional on (X, Y) in both CM and CF ( $p<0.01$ , t-test).

Table 7 Average transfer $({\overline{t}}_1,{\overline{t}}_2)$ in T2 by game and action profile

	CM2				CM4				CM6
	X		Y		X		Y		X		Y
X	8.4	1.2	−	−	24.8	0.8	1.7	−	43.8	1.4	−	−
	$\frac{16}{59}$	$\frac{5}{59}$	$\frac{0}{3}$	$\frac{0}{3}$	$\frac{20}{56}$	$\frac{3}{56}$	$\frac{1}{3}$	$\frac{0}{3}$	$\frac{19}{52}$	$\frac{4}{52}$	$\frac{0}{6}$	$\frac{0}{6}$
Y	−	−	−	−	33.3	0.3	−	−	70.0	−	−	−
	$\frac{0}{0}$	$\frac{0}{0}$	$\frac{0}{0}$	$\frac{0}{0}$	$\frac{1}{3}$	$\frac{1}{3}$	$\frac{0}{0}$	$\frac{0}{0}$	$\frac{1}{4}$	$\frac{0}{4}$	$\frac{0}{0}$	$\frac{0}{0}$

	CF2				CF4				CF6
	X		Y		X		Y		X		Y
X	10.9	0.6	6.7	−	27.9	1.0	−	−	42.4	2.5	0.3	−
	$\frac{17}{39}$	$\frac{2}{39}$	$\frac{2}{9}$	$\frac{0}{9}$	$\frac{24}{44}$	$\frac{3}{44}$	$\frac{0}{9}$	$\frac{0}{9}$	$\frac{27}{47}$	$\frac{5}{47}$	$\frac{1}{8}$	$\frac{0}{8}$
Y	4.6	1.8	−	−	15.8	−	−	−	44.0	0.2	−	−
	$\frac{4}{12}$	$\frac{2}{12}$	$\frac{0}{2}$	$\frac{0}{2}$	$\frac{4}{8}$	$\frac{0}{8}$	$\frac{0}{1}$	$\frac{0}{1}$	$\frac{2}{5}$	$\frac{1}{5}$	$\frac{0}{2}$	$\frac{0}{2}$

The table lists for each action profile the average transfer amounts ( ${\overline{t}}_1:1\to 2$ and ${\overline{t}}_2:2\to 1$ ) in line 1, and (#obs. of positive transfer)/(#obs. of the action profile) (by role 1 and role 2) in line 2

Table 15 in Appendix A.1 presents regressions of absolute and relative transfer amounts as well as the likelihood of positive transfer focusing on role 1 after his own choice of X.Footnote ³⁴ It shows that both the average transfer and the likelihood of positive transfer are larger when role 2 chooses X in both CM and CF, and also larger in CF than in CM.Footnote ³⁵ Moreover, while the inequality dummy k has a positive impact on absolute transfer (models (4) and (7)), it has no significant impact on the likelihood of positive transfer (models (6) and (9)).

Observation 4

(Size and frequency of transfer)

1. 1. The average transfer by role 1 is significantly positive.

2. 2. Positive transfer by role 1 is more likely after the choice of X by role 2, and both absolute and relative transfer is larger in this case.

3. 3. Positive transfer by role 1 is more likely in CF, and the size of transfer is larger in CF.

4. 4. Higher inequality increases absolute transfer, but not the likelihood of positive transfer.

Observations Footnote ⁴.1-4.3 support the reciprocity hypothesis Footnote ¹b. Furthermore, the insignificance of the degree k of inequality in Observation Footnote ⁴.4 is consistent with the reciprocity hypothesis Footnote ¹c. On the other hand, the size of transfer in Observation Footnote ⁴.4 is not implied by our theory of reciprocity. Turning to the competing hypotheses, the positive transfer is consistent with the IQA hypothesis Footnote ³b, but not with the IEA hypothesis Footnote ²b. Regarding the size of transfer, the effect of k is consistent with the IQA hypothesis Footnote ³c. However, the smaller transfer in CM-T2 than in CF-T2 does not support IQA since CM has higher inequality than CF for the same level of k.

Positive transfer by the role 1 subjects improves equity as measured by the ratio of the final payoffs ( $\frac{u_1}{u_2}$ ). Figure 7 in Appendix A.2 shows the average payoff ratio for T1 and T2. For each k, we see that redistribution raises equity in both CM and CF. In fact, the null hypothesis of no difference between T1 and T2 is rejected for all k in CM ( $p<0.05$ , t-test) and for $k=2$ and $k=4$ in CF ( $p<0.01$ , t-test).Footnote ³⁶ The strongly significant impact of redistribution on equity in both CM and CF is confirmed by the Tobit regressions of the payoff ratio in Table 16 in Appendix A.1.

7 Heterogeneity across subjects

As observed earlier, some fraction of role 2 subjects choose $A=(X,X)$ in the dictator-decision task CF-T0. There are also subjects who switch from $D=(Y,Y)$ to A as inequality k increases. In other words, we can interpret these role 2 subjects as preferring efficiency to equity as the efficiency gap between A and D widens. We hence say that role 2 subjects are inefficiency averse (IEA) if, in CF-T0, they choose A for all k, or switch once from D to A as k increases. On the other hand, those role 2 subjects who choose D for all levels of k, or switch from A to D once as k increases are either self-interested or do not tolerate high inequality at A.Footnote ³⁷ We call them inequality averse (IQA) type. Out of thirty role 2 subjects who made a choice in CF-T0, twenty are IQA, whereas six are IEA. As seen in Table 8, while type IEA chooses X most of the time in T1 and T2 and doesn’t substantially change behavior from T1 to T2, type IQA chooses X less often overall, but increases the choice of X substantially in T2. As far as role 2 is concerned, hence, we can deduce that the increased choice of X in CF-T2 is by type IQA motivated by the reduced concern over inequality at (X, X) and/or the payoff loss at (X, X) (compared with (Y, Y)) in anticipation of the choice of X and positive transfer by role 1.Footnote ³⁸

Table 8 Rate of action X in T1 and T2 by role 2’s type in CF-T0

Type	CM-T1			CM-T2
	$k=2$	$k=4$	$k=6$	$k=2$	$k=4$	$k=6$
IQA	0.90	0.80	0.85	0.90	0.90	0.95
IEA	1.00	1.00	1.00	1.00	1.00	1.00

Type	CF-T1			CF-T2
	$k=2$	$k=4$	$k=6$	$k=2$	$k=4$	$k=6$
IQA	0.60	0.70	0.50	0.70	0.75	0.70
IEA	0.83	0.83	1.00	0.83	1.00	1.00

Table 9 Rate of action X by T1 types

	CM-T1						CF-T1
	Role 1			Role 2			Role 1			Role 2
	$k=2$	$k=4$	$k=6$	$k=2$	$k=4$	$k=6$	$k=2$	$k=4$	$k=6$	$k=2$	$k=4$	$k=6$
TY1	0.86	0.57	0.00	0.75	0.50	0.00	0.47	0.20	0.00	0.53	0.35	0.00
TX1	0.94	0.98	1.00	0.98	1.00	1.00	0.79	0.91	1.00	0.78	1.00	1.00

	CM-T2						CF-T2
	Role 1			Role 2			Role 1			Role 2
	$k=2$	$k=4$	$k=6$	$k=2$	$k=4$	$k=6$	$k=2$	$k=4$	$k=6$	$k=2$	$k=4$	$k=6$
TY1	1.00	0.71	0.71	0.88	0.75	0.63	0.53	0.67	0.60	0.59	0.71	0.65
TX1	1.00	0.98	0.96	0.98	1.00	0.96	0.88	0.94	0.97	0.90	0.90	0.93

How does the difference in behavior in T1 translate to the difference in the transfer decisions in T2? For each role 1 subject, let his reciprocation index r be defined by

$\begin{array}{c}r=\frac{\#\text{positive transfers after}(X,X)}{\#\text{occurrences of}(X,X)}.\end{array}$

Each role 1 subject experienced (X, X) up to six times, and we call role 1 strongly reciprocating (SR) if $r\ge \frac{2}{3}$ , weakly reciprocating (WR) if $r\in \left(\frac{1}{3},,,,\frac{2}{3}\right)$ , and non-reciprocating (NR) if $r<\frac{1}{3}$ . Table 19 in Appendix A.1 shows overall downgrading of reciprocity types going from CF-T2 to CM-T2: Nearly half of type SR in CF-T2 become NR in CM-T2, while few type NR in CF-T2 become SR in CM-T2. Table 10 shows the relationship between the type classification in T1 (i.e., TX1 and TY1 for role 1) and reciprocity types in T2. In CF-T2, the distribution of reciprocity types is almost identical between TY1 and TX1 with an even split between SR and NR. On the other hand, in CM-T2, nearly two-thirds of TX1 are NR, while it is much less likely that TY1 becomes NR. This shows that TY1 and TX1 are equally likely to reciprocate role 2’s choice of X accompanied by payoff sacrifice, but that TX1 is more likely to ignore 2’s choice of X if not accompanied by payoff sacrifice. In other words, TX1 and TY1 are different in the perception of kindness by role 2 that has led to the increase in their own payoff.

Table 10 T1 types and reciprocity types in T2

	CM-T2			CF-T2
	SR	WR	NR	SR	WR	NR	Other
TY1	5	0	2	5	1	5	4
TX1	12	9	31	16	3	15	0
Other	1	2	0	7	2	4	0

Reciprocity type “other” refers to role 1 who didn’t experience (X, X)