Dear Editor
First of all thanks a lot for the stimulating comments and suggestions received which greatly contributed to improve our work. Here below we explain how they helped us to revise and reformulate our paper. In this first page we start with a short synthesis of what we did (the details for each point follow in the response to the referee).
The referee raises four points.
In the first he wonders whether we need the concept of relational goods and why such concept adds something to the more traditional ones of reciprocity and guilt aversion which could have been used in alternative in our model. We explain in what follows and in the paper the difference between relational goods and the other two concepts and the originality of the former proposed by the “Italian school” with reference also to a paper published on IREC. We also document why the introduction of relational goods provides richer insights explaining that some of the results obtained in the paper cannot be obtained with the other two concepts. More specifically, we focus on the fact that with relational goods (differently from reciprocity and guilt aversion) we i) attach a different specific value to the cost of abusing depending on the history of the past relationship with the counterpart and ii) produce a corresponding loss for the abused counterpart. This is not the case with reciprocity and guilt aversion where the decision to abuse generates, only on the abusing individual, a constant loss invariant in the history of the relationship and depending on her own moral disposition. In essence, the two consequences described above and applied to our game illustrate that reciprocity and guilt aversion fail to capture the “otherness” and specificity of the relationship.
The second is a point on the infinitely repeated game proposition in section 2.1. Here the referee finds that there is a superfluous comment (not a mistake in the proposition) which we remove. The comment in the paper is enriched due to the insights provided by the referee.
With the third comment the referee argues that part of proposition 5 is trivial and that this part is the core of the paper. We argue that the paper is much more articulated and, even in proposition 5, it contains actually 3 points. We explain to the referee that the proposition is not trivial since the introduction of the pay for performance scheme may trigger cooperation or not even with purely self interested preferences according to different parametric conditions. Note that the comment of the referee highlights an important feature of the model which leads us to enrich the interpretation of the same proposition with new insights. He says that the firm has no incentive to introduce large pay for performance schemes since they may crowd out cooperation in presence of relational goods. That is exactly what we want to say. Hence our way of modeling the firm as a trust game corporation in presence of relational goods provides an explanation on why firms do not introduce such schemes as the standard theory would predict.
In the fourth point the referee requires a definition of stationary equilibrium and a formal proof of what we say. We do both. Furthermore, the point made by the referee gives us an idea to enrich our comment to the proposition showing that our findings are invariant to small reasonable changes to the law of motion of relational goods.
In what follows we explain in detail our comments and revisions for each of the four points.
Leonardo Becchetti
(also on behalf of Noemi Pace and Giuseppina Gianfreda)
Dear Referee
First of all thanks a lot for the stimulating comments and suggestions received which greatly contributed to improve our work. Here below we explain how they helped us to revise and reformulate the paper.
POINT 1
Referee point
The notion of "relational goods" was introduced long ago by Uhlaner (1989), but so far it failed to attract attention from the economic profession. (The literature quoted by the authors on relational goods is very scant indeed.) In the meanwhile, the literature on social preferences literally exploded, and we have many different alternatives to choose from if we decide to model non-sel.sh preferences. Before the reader is asked to familiarize himself with yet another version of social preferences, it would be nice to see why one cannot reach the same results with other models that are more familiar. For example, the authors
mention reciprocity as modeled by E. Fehr and his coauthors. They state, without proof, that relational goods are distinct from reciprocity. However, it seems to me that their conclusions do not differ too much from those that one could obtain by applying standard models of reciprocity or "guilt aversion" to the trust game. A discussion of this point would clearly make the paper stronger.
OUR RESPONSE
We agree that, given what considered by the referee about literature developments of the different preference concepts mentioned above, a more in-depth discussion of the specificity of relational goods would make the paper stronger. In what follows we: i) say more on the literature of relational goods; ii) explain why relational goods are distinct from reciprocity or guilt aversion; iii) explain why results of the paper cannot be reached with reciprocity or guilt aversion. In the end of the discussion we explain our changes in the paper.
In essence we show that the concept of relational goods is more faithful to describe essential characteristics of relationships, necessary to describe what to us is a fundamental feature of the functioning of team working in modern corporations and to obtain the results we have in the paper
THE CONCEPT OF RELATIONAL GOODS
The concept of ‘Relational goods’ was introduced in economics by Gui (1987) and Uhlaner (1989) to define a set of intangibles ranging from companionship, sympathy and intimacy, to feeling part of a community with the same values or tastes etc. Bardsley and Sugden (2006) borrow from Adam Smith’s “Theory of Moral Sentiments” the term ‘fellow-feelings’, to describe the mental states produced during such non instrumental social interactions. The production process of these goods is the meeting - ‘encounter’ in Gui (2005)’s definition - with family and friends or with a wider net of partners.[1] Many kinds of social events (association gatherings, cultural or sport events, etc.) can be defined as ‘encounters’. Participating in a political debate, volunteering, applauding at a theatre are examples of relational goods produced on this larger scale.
Despite the controversial issues on the nature of relational goods, there is a general consensus that such goods cannot be defined using the standard properties of rivalry and excludability. Randon, Bruni and Naimzada (2008) suggest three new characteristics: simultaneity, motivation, and identity (Gui (2002), Sugden (2005) and Uhlaner (1989) commonly agree with them). According to the authors, (p. 114-115) “simultaneity implies not only that the good is jointly produced and consumed by individuals but also that production and consumption occur at the same time. Motivation, instead, emphasises the intention behind the social interactions. For the production–consumption of social relationships, the attitude of individuals toward the social event turns out to be crucial. Not every meeting produces relational goods: a sincere attitude of the individuals involved in the relationship is required for their production. The last property rules out the possibility that relational goods may be connected to anonymous interactions between individuals.”
EMPIRICAL ANALYSIS ON RELATIONAL GOODS
Interestingly, life satisfaction has been found to be negatively correlated with TV viewing, directly in Frey et al. (2007) and indirectly, by reducing the time spent in relational activities, in Bruni and Stanca (2008). Frey et al. (2007) find this evidence difficult to reconcile with the theory of revealed preferences, by which any observed choice is utility maximizing, and interpret the finding as suggesting that people do not always act rationally, but often just follow habits and impulses. Indeed Frey et al. (2006) argue that individuals are prone to mispredict utility, through underestimation of adaptation, distorted memories of past experiences and materialistic beliefs fostered by institutions (e.g. marketing) and that these cognitive limits lead them to overconsume goods satisfying extrinsic needs (material goods beside basic necessities) and underconsume goods satisfying intrinsic needs, relational goods among them. Empirical evidence on these distorted choices is offered by these authors by studying commuting. Similar ideas were first developed by Scitovky who, in his Joyless Economy (1976). advised that we’d be better off spending our time on things that we will not adapt to (meeting friends being a prominent example) rather than getting “joyless” goods the comfort of which is just temporary. Goods are "joyful" only if they present us with challenge and if their use produces a sense of accomplishment and fulfilment. However the enjoyment of such goods intrinsically requires an effort on the part of the consumer, not just on the part of the producer, an effort which is higher when one starts to consume them. So basically there are high entry costs that may discourage the use of such goods.[2]
A further problem is that the market can push consumers to non optimal choices by offering artificial substitutes for ‘joyful’ goods, at a lower cost due to technological progress: an obvious case of Baumol’s disease. Genuine relational goods can be more and more crowded out by virtual relational goods.[3]
A different explanation, by no means alternative to the ‘behavioral’ one described above, hinges on the fact that relational goods, by definition, are not an option freely available at the individual level. An individual’s time use choices may be contingent on the time use choices of others, because the utility derived from leisure time (relational goods) often benefits from (requires) the presence of companionable others. Corneo (2005), Jenkins and Osberg (2003) Antoci et al. (2007) and Bruni et al. (2008) develop models starting from this premise that one cannot have a social life unilaterally. Various types of external effects concerning relational goods can be distinguished: there are externalities in the formation of an agent’s social network as the probability of a successful match with a partner increases with the time the agent and the potential partners devote to searching, while a second type of externality concerns the efforts by the agent and the potential partners in cultivating their skills as partners. Finally, there are externalities at the aggregate level since it is easier and more rewarding to participate in an association in a social context characterized by a rich network of associative opportunities. In this respect, Merz and Osberg (2006) find that the proportion of leisure time devoted to social leisure is higher in Lander with more public holidays.
Due to these multi-level net of externalities, equilibria with low socializing may coexist with equilibria with high socializing for groups of individuals as well as for nations as a whole.[4]
The consumption of relational goods could affect labour supply decisions: when other persons increase their hours of paid work, the probability of a feasible and desirable leisure match falls, thereby decreasing the personal utility of non-work time. The consequences of such strategic complementarities in the enjoyment of leisure are considered in Alesina et al. (2005) and Burda et al. (2008) in analyzing the difference in hours worked between Europe and the US, which has emerged in the 1970’s and has been increasing since then. This difference might not be due to a difference in the tax system, as maintained by Prescott (2004), or in tastes as suggested by Blanchard (2006), instead history (e.g. the first oil shock) and institutions (labor - market regulations) might have simply led otherwise identical Americans and Europeans to coordinate on different equilibria[5]. In the “US” equilibrium, individuals work a lot, consume a lot, and have little time for communal activities. In the “European” equilibrium, consumers work less and consume less, but enjoy more common leisure.
Finally, the theme of relational goods is at least implicitly present in the vast literature on social capital, which studies the impact of social ties on the productivity of traditional private goods. Higher social participation may bring about social capital accumulation as a by-product. For instance, trust (or empathy) may be reinforced and generalised through social interactions.[6]
THE CONCEPT OF RECIPROCITY
Following Greig and Bohnet (2008) “Reciprocity is an internalized norm, inducing people to respond to kindness with kindness and to unkindness with unkindness, even if it is not in a person’s material self-interest to do so. It differs fundamentally from cooperation in repeated games where reputational concerns can enforce “cooperation” (e.g., Kreps et al., 1982; Fudenberg and Maskin, 1986).”
Many believe that reciprocity is a universal social norm. For example, Gouldner, one of the first to point out the importance of this norm, wrote: “A norm of reciprocity is, I suspect, no less universal and important an element of culture than the incest taboo…” but its “concrete formulations may vary with time and place” (Gouldner, 1960, pp.171).
THE CONCEPT OF GUILT AVERSION
According to Baumeister et al. (1994) guilt is ...”an unpleasant emotional state... that is aused by..the infliction of harm, loss, or distress on a relationship partner (p. 245).” Corazzini, Kubez and Maréchal (2007) add that “If subjects feel guilty because of (believing that they are) letting others down, they shoulder psychological costs of lying. These costs increase with the perceived harm of deceiving others (see Baumeister et al. (1995) and Dufwenberg (2002) (p. 2)).”