Why do some countries lag behind others? In India where some states equal the size of countries, uneven development has always been a policy concern but the map of India still shows strong regional disparities. The World Bank, generally seen as the development doctor, has had an interesting evolutionary path of prescriptions.
Moving away from its traditional pure market approach in its policy recommendations, it began examining the role of institutions in determining development. Now, its growth and macro-economics team uses inputs from behavioural economics to explain differential development patterns.
A recent World Bank Policy Research Paper by Fehr, Hoff and Kshetramade* looks at the connection between spite and development. The argument is as follows: given the lack of effective institutions in a developing country, the key ingredients in a success story are endogenous contract enforcement and the ability of ordinary citizens to resolve coordination and cooperation problems.
How people get along with each other is determined by social preferences and the authors therefore look at spite as one of the obstacles to development. 'Spiteful preferences' are defined as 'the desire to reduce another's material payoff for the mere purpose of increasing one's relative payoff.'
For instance, an experiment cited in the paper from Netherlands showed that some people preferred an allocation of money that gave 480 for themselves and 80 for the others, to the option of 540 for themselves and 280 for the others.
Spiteful people are more likely to violate contracts because this actually increases their payoff at the expense of the other.
It is harder to motivate a spiteful person to cooperate because there is a higher marginal cost to contributing to a public good - now there is also a non-pecuniary cost, any contribution may reduce his relative higher position. Fortunately, such people were in a minority in that experiment - 12-13 per cent. Unfortunately, when the researchers conducted similar games in Uttar Pradesh, the situation was quite different.
There were three games conducted and caste hypotheses brought in to check the social preferences in villages towards cooperation. In a one-shot exchange game with third party punishment, three players A, B and C were given Rs 50, 50 and 100 respectively. A had to choose whether to keep his money (the game ends) or give it to B, in which case, the amount was tripled; B then had Rs 200. B had the choice of keeping the money (defector) or sharing (cooperating) equally with A.
If B cooperated, each ended with Rs 100. C could punish B but had to spend for that and for every Rs 2 spent on punishment, B lost Rs 10. C was asked his choice in both cases of B's decision, even before he was told the actual decision. On an average, defectors were punished more than cooperators. But, in 61 to 73 per cent of the cases, C punished B for cooperating. In the stag hunt game, the mutual cooperation payoff is the highest, but the higher castes were more likely to choose the non-cooperative option.
In the binary choice dictator game, groups of 2 were formed, both from the same caste. More than 40 per cent of high caste members chose the option of Rs 90 to themselves and 70 to the other, over Rs 90 to both. Only 21 per cent of lower caste members showed this spiteful preference. The three games show that on an average, high caste members have a larger prevalence of spiteful preferences and a lower ability to cooperate. In rural Uttar Pradesh, status and superiority influence economic decisions for higher castes.
All this of course will be old hat to natives of this country - we are well versed in stories of spite hurting cooperation and growth. With development models now integrating behavioural factors, the obvious question is 'what next?' The authors conclude, 'An exciting question for future research is the extent to which different institutions and cultures produce preferences that are conducive or detrimental to economic development.' Right, so we can expect more papers from them. But for us, the practical problem remains - can we change? Or will we continue to be 'like this only?'
*Fehr, Ernst & Hoff, Karla & Kshetramade, Mayuresh, 2008. "Spite and development," Policy Research Working Paper Series 4619, The World Bank.
Sumita Kale is chief economist at Indicus Analytics and can be contacted at sumita@indicus.net
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