Distributional consequences of Endogenous and Compulsory Delegation

Distributional consequences of Endogenous and Compulsory Delegation Lara Ezquerra Praveen Kujal September 2016 Abstract We study endogenous delegation in a dictator game where the principal can choose whether to delegate the allocation decision. Half the subjects choose to delegate. We find that more egalitarian distributions occur when delegation is optional relative to when delegation is compulsory. Agents dividing the endowment in endogenous delegation redistribute higher amounts to recipients than agents in compulsory delegation. Interestingly endogenous delegation gives similar allocation outcomes as those observed under the standard dictator game. 1

1 Introduction In this paper, we test the distributional consequences of endogenous delegation. We wanted to see whether those that choose (not) to delegate behave in a (different) similar fashion to Hamman et al (2010). That is, if one wants to take a harsh decision of transferring low amounts do they use the delegation mechanism that we provide them with? Further, are those who choose not to delegate more prosocial and share more with the receivers. We find that endogenous delegation generates more egalitarian distributions relative to compulsory delegation. Furthermore, the distribution made under endogenous delegation converges to the one observed under the standard dictator game. Using the dictator game delegation has been studied in experimental literature by Hamman et al. (2010); Bartling and Fischbacher (2012) and Oexl and Grossman (2013). The results point towards delegation being used as a tool to hide behind unfair decisions. Hamman et al. (2010) find that under compulsory delegation the amounts redistributed to recipients are lower than in the standard dictator game. Meanwhile, Bartling and Fischbacher (2012) and Oexl and Grossman (2013) allow recipients to punish principals and agents for their actions. They find that delegation is effective at avoiding principals being held the only responsible for the unfair decisions. The main results from this this literature is that the distribution is less egalitarian when forced delegation is implemented. That is, agents favor the principals and transfer little to the recipients. We can associate this results with Hoffman et al. (1996) who show that increasing the social distance leads to lower redistribution to recipients in standard dictator games. The social distance in this case is increased with the decision being taken (compulsorily) by the agent. Following our predecessors Hamman et al. (2010), the first treatment is the standard dictator game (with no delegation) in which a principal has to divide an endowment between himself and a recipient. The second treatment, allows the principal to choose between delegating or taking the 2

decision of dividing the endowment. The third treatment, follows Hamman et al. (2010) where the principal has to delegate the decision of dividing the endowment on an agent who comes from a competitive market. We replicate their results and find that principals select those agents who allocate less to recipients. We observe that agents behave differently when delegation is compulsory (they allocate low amounts to recipients) than optional (they allocate higher amounts to recipients). Agents compete with another agent in compulsory delegation and with another agent and the principal in endogenous delegation. This may cause issues such as players believes on principals and other agents. To test if agents behavior is related to the amount of competitors perceived we create an extra treatment that replicates treatment 2 (optional delegation) but without informing agents about principals possibility of choosing themselves. The results of this extra treatment converge to the results of the endogenous delegation treatment hinting that the endogenous delegation mechanism where social distance is weaker (dictators have the choice to use an agent or not) produces more egalitarian outcomes than the compulsory delegation one. Overall, we find that the amounts allocated to recipients under endogenous delegation converge to the amounts redistributed by dictators in the standard dictator game. Moreover, this amounts are superior to the ones shared by agents when delegation is compulsory. In addition, we observe that when possible principals delegate in roughly half of the cases. Agents transfer higher amounts than principals in endogenous delegation. The change in agents behavior is not caused by informational differences between endogenous and compulsory delegation. 2 Literature Review To study delegation previous literature has used the well-known dictator game (Forsythe et al., 1994) and modify it to allow for delegation (Hamman et al. 2010; Bartling and Fischbacher, 2012; Oexl and Grossman, 2013) obtaining that compulsory delegation results in less equalitarian outcomes 3

than the standard dictator game. Others have study delegation using an ultimatum game bargaining situation (Fershtman and Gneezy, 2001) and labor markets environment (Fehr et al. 2010; Charness et al. 2012 and Maximiano et al. 2013). Dictator games have been extensively studied by previous literature. In the meta-study of Engel (2010) that includes data from more than 120 studies, the average amounts redistributed to recipients represent the 28% of the pie. 1 Also previous studies suggest that these amounts may increase if social distance between principals and recipients decreases by identifying principals by their surname (Charness and Gneezy, 2008) or making principals feel that anonymity is not ensured (Hoffman et al. 1996). Furthermore, framing effects also vary the amounts transferred to recipients. Branas-Graza (2007) finds that emphasizing the dictators responsibility over the outcome increases dictators generosity. List (2007) finds that framing affects the outcome of a dictator game. On one treatment, principals were asked to split the endowment while on the other, they were asked to take money from recipients. This change in framing affected the outcome as principals transferred less money to recipients when they were in the take treatment. Hamman et al. (2010) introduce a variant of the dictator game where principals delegate on agents. They find that agents who share less with recipients are selected more often. This is in line with their claim that delegation is a tool used by principals to hide behind agents when unfair decisions have to be taken. The dictator game with agent environment has also been used to study the effect of agents or principals being punished by their actions. Bartling and Fischbacher (2012) use groups of one dictator, one agent and two recipients and give one of the recipients the power to punish other players for their actions. They obtain that punishers use their power on both dictators and agents only when the outcome is unfair. Moreover, Oexl and Grossman (2013) extend the previous study and see that delegation is ef- 1 Similar average amounts are obtained by Camerer (2003) who analysed the data of 11 studies and by Cardenas and Carpenter (2008) who perform a similar analysis with dictator games conducted in developing counties. 4

fective to shift the blame from principals to agents. Coffman (2011) also finds that intermediation reduces principals punishment when the punishers payoff is independent of the principals actions. This research shows that delegation is a useful mechanism when one wants to shift the blame for taking unfair decisions. On one side, the principal shifts the blame by making the agent decide, while the agent feels that is the principal the one pushing him towards the unfair outcome. Fershtman and Gneezy (2001) vary the environment using an ultimatum game on which proposers can delegate the offer made to the recipient to an external agent. They find that when delegation is chosen the payoffs of the proposers increase. Choy et al. (2015) also use the ultimatum game to compare exogenous and endogenous delegation in a bargaining environment and find that unfair outcomes are less likely under endogenous delegation. Agents on which principals delegate, make higher proposals which in turn originates less inequality between subjects earnings. There are other papers that have studied the joint effect of delegation and other factors such as dishonesty, corruption, information, gender 2 or bargaining. Erat (2013) and Sutan and Vranceanu (2015) examined dishonesty on environments with endogenous delegation of decisions. Sutan and Vranceanu (2015) use a dictator game on which proposers can lie about delegating to a third party. They find that imperfect information 3 increases the proposers profit by shifting its blame. 4 Similarly, Erat (2013) showed that agents are more frequently hired when they have to lie in a sender-receiver 2 Bottino and Kujal (2016) show that in a compulsory dictator game female and male principals behave similarly while as agents females show greater redistributive concerns relative to their male counterparts even though it is detrimental to them as they are selected less often. 3 Lai and Lim (2012) study the effect of information and communication on delegation (without cheating option) and find that generally principals under-delegate even when is more profitable to do so. Furthermore, Cettolin and Riedl (2010), use delegation to prove that under unceirtanty there is a violation of rationality in decisions. 4 On this line, Jacquemet (2005) and Drugov et al. (2011) examine how intermediaries increase corruption by diminishing the moral cost of being corrupt by effectively shifting the blame of being corrupt. 5

game. 5 Finally, endogenous delegation has been studied in a labor markets environment. Schotter et al. (2000) showed that bargaining between agents is more inefficient than a face to face bargaining between principals. Huck et al. (2003) explore delegation in a duopoly environment while Fehr et al. (2010), Charness et al. (2012) and Maximiano et al. (2013) show the effect of endogenous delegation on labour markets with gift exchange. They all conclude that workers in which agents delegate are more likely to provide higher effort levels. 6 Finally, Hamman et al. (2010) also run some experiments with endogenous delegation. Subjects first play 8 periods of compulsory delegation and then, 4 periods of endogenous delegation. They find that subjects in endogenous delegation behave similarly to subjects in compulsory delegation. When we introduce endogenous delegation from round 1, this result does not hold as we find that distributions are more egalitarian than in compulsory delegation. To see the robustness of our results we replicated the treatment in Hamman et al. (2010) obtaining the same results, therefore subjects who play first compulsory delegation and then endogenous delegation were affected by the previous periods and the learning they obtained from it. The rest of the paper is organized as follows. Section 3 describes our experimental design in detail. Section 4 presents our main results. Section 5 concludes. 3 Experimental design A total of 236 subjects were recruited via email 7 to participate on this experiment that took place at Middlesex University London. Each subject participated on one treatment 8. In addition to the experimental earnings, 5 Surprisingly dishonesty on the sender-receiver game with agent is prevalent even when the identities of cheaters are revealed to other players (Van de Ven and Villeval, 2015). 6 Moreover delegation has a positive effect in diminishing free riding problems (Hamman et al. 2011). 7 ORSEE (Greiner, 2015) was used for subjects recruitment. 8 Instructions can be found in Appendix C. 6

subjects were paid a 5 show-up fee plus 2 from completing a series of questionnaires after the experiment. The experiment lasted for approximately 45 minutes and subjects earned on average roughly 12. We conducted 15 sessions as explained in Table 1 that contains the summary of the experimental design. The experiment consisted in four treatments. In each treatment 10 or 8 9 subjects played a dictator game with or without delegation option. Upon arrival participants read the instructions and were informed of their roles. To avoid framing we called them players A, B and C instead of principal, recipient and agent respectively. The experiment lasted 12 rounds. Each participant was assigned a role and an identification number for the whole experiment. The purpose of the identification number was to guarantee anonymity to each participant. They were also told that in each round they would be randomly matched with another participant. At the end of the 12th round subjects were asked to fill two brief questionnaires. The first one included some socio-demographic questions and a CRT test (Frederick, 2005) while the second was related to the decisions taken during the experiment. 10 Our payment scheme is a variation of the one in Hamman et al. (2010). 11 Both players A and B were paid in cash for one randomly selected round drawn at the end of the experiment. Players C were paid differently. In addition to the 5 show-up fee they obtain other 5 additional pounds at the beginning of the experiment. This was considered their starting capital. Their experimental payment was calculated as follows: π i = 0.30 + 0.15n i Where, 0.30 represents the fix costs that agents face in each period regardless of them being selected by any principal. n i is the number of principals 9 The group size depended upon show up. 10 See Table A.2 in Appendix A for a summary of the questionnaire answers. 11 We modified the coefficients of the payment equation to adapt it to the amount of players that we had per session. 7

choosing agent i, therefore the number of decisions that the agent makes and will be multiplied by 0.15. At the end of the 12 rounds and the questionnaires each participant received a sealed envelope with their identification number and the amount they earned. Treatment 1: Baseline (BS) The BS treatment is the standard dictator game. An initial endowment of 10 is assigned to each pair formed by one principal and one recipient. The principal decides how to allocate that endowment between himself and the recipient. Once the decision is taken recipients are informed of their earnings. We run four sessions with 40 subjects. In each session half of the subjects are assigned the role of the principal and the other half the role of the recipient. In each round, principals are told that they have to divide an endowment of 10 between themselves and a randomly matched recipient. Principals are informed that they will be matched with different recipients in each round. Treatment 2: Endogenous Delegation (ED-1) 12. We introduce a third player, the agent. Subjects can choose one of the two available agents (A1 and A2) or to make the decision themselves. If the principal selects one of the two agents, this agent will then divide the endowment. This treatment had 96 participants and 11 sessions. In CD and ED-1 agents behave in a different way. One possible explanation for this can be competition. Note that in CD agents had only another competitor, the other agent. Meanwhile in ED-1 agents competed among themselves and with the principal. That this may result in agents having beliefs about principals. Therefore the knowledge of this extra competitor that is at the same time the decision maker, may have affected their behavior and diminish 12 Following Hamman et al (2010) we also performed a treatment on which subjects participate in a CD treatment for 6 rounds and ED-1 during the last 6 rounds. We replicated this treatment for consistency reasons. Our results replicate those of Hamman et al. (2010) where they observe that the behaviour in ED and CD is similar. In both cases the amounts given to the recipient are low and decrease over time. We present the results of this treatment in Appendix B 8

competition (Garcia and Tor, 2009). Treatment 3: Endogenous Delegation without Information (ED-2) We create a new treatment (ED-2) in which agents were not informed about the option of principals to choose not to delegate (see instructions in Appendix C). This new treatment is created in order to see if the amount of information provided to agents affects their behavior. We had 56 participants playing in 6 different sessions. Treatment 4: Compulsory Delegation (CD) In this treatment we replicate Hamman et al. (2010). The agent will be the one dividing the money between the principal and the recipient. Each session has two agents: A1 and A2. The principals select one of the two agents to divide the endowment on each round. 13 Results from previous literature suggest that compared to the BS treatment subjects end up sharing significantly less. Table 1: Summary of the experimental design Baseline Endogenous Endogenous Compulsory Delegation Delegation Delegation (BS) (ED-1) Information (ED-2) (CD) Divides the endowment Principal Agent/Principal Agent/Principal Agent Sessions 4 11 6 5 Number of subjects 40 96 56 44 Principals/Agents/Recipients 20/-/20 37/22/37 22/12/22 17/10/17 13 In Hamman et al. (2010), principals were randomly allocated to an agent at the beginning of period 1, introducing the possibility of choosing one agent or the other from round 2 on. This study will differ as principals choose an agent on every possible round, including round 1. We chose not to impose one round of compulsory delegation before making delegation optional in order to avoid any effect from this initial round. 9

4 Results Figure 1 shows the amounts allocated to recipients in ED-1 and ED-2 treatments by round. Figure 1: Amounts transferred to the recipient by round in ED-1 and ED-2 treatments Overall we find that ED-1 and ED-2 give us the same results. The average shared amount with recipients in ED-1 is 3.47, not statistically significantly different from the average transferred amount in ED-2, 3.49 (z= 0.731 p= 0.4649 in a Mann-Whitney test). In both treatments roughly half of the decisions were delegated, hinting that principals behavior did not change either. If we focus on agents, this treatment also reflects that agents transfer higher amounts to recipients than principals in both ED-1 and ED-2. Therefore we can conclude that information does not cause differences in agents behavior between ED-1 and ED-2 treatments. From now on, we will analyze together the data of ED-1 and ED-2 and name this joint data ED. 10

Giving to recipients Figure 2 shows the amount transferred to recipients by round in each of the treatments. Note that the ED treatment is divided in ED-delegation and non-delegation. The first shows the allocations made by agents on which principals delegated and the second the allocation decisions made by those principals who chose not to delegate. Figure 2: Amounts transferred to the recipient by round and treatment Figure 2 shows that BS and both ED treatments follow a very similar pattern across time while in CD the amounts given to the recipient are lower from round 4 on. The average amount transferred by the principals in the BS treatment is 3.56. Meanwhile, in the CD treatment the average shared amount is 2.55 14 and in the ED 3.48. 15 Moreover, the average amounts 14 Our results in BS and CD treatments are qualitatively equal to the ones of Hamman et al. (2010). Still the obtained amounts are roughly above the ones in Hamman et al. (2010): 2.18 in the BS and 1.73 in the CD. This is probably due to our populations being different or to the change in parameters and participants per session. 15 A t-test confirms that the average amounts shared in BS and ED are not significantly 11

redistributed to the recipient in the ED treatment with agents is 3.83, while the average in the ED treatment when principals do not delegate is 3.14. 1617 A Mann-Whitney (rank-sum) test confirms that the populations of BS and ED follow the same distribution (z=0.677 p=0.49) while BS and CD (z=2.347 p=0.018) and CD and ED (z= -1.976 p=0.048) do not follow the same distribution. If we split our sample by group of rounds, the previous findings hold for all the periods but the first four periods where CD performs similarly to ED (z=-0.930, p=0.352) and BS (z= -0.246 p=0.280). 18 This means that decision makers behave similarly during the first four rounds and that their behavior changes and adapts to the treatment from round 5 on where the amounts reallocated in CD become lower than in BS or ED. Finally, if we calculate the Gini index by treatment we obtain that the value is higher in CD (0.28) than in ED (0.23) or BS (0.22). This shows that, CD generates more inequality than the other treatments. Endogenous delegation principals and agents behavior as decision makers If we further explore the sharing behavior of principals and agents in the ED treatment (Table 2) we observe that delegation is chosen in roughly the 50% of the cases 19. In addition, the amounts shared by principals are always lower than the amounts transferred by agents. Compared to CD, different (t=0.396; p-value= 0.69) while both of them differ from the one of the CD (BS and CD, t= 2.073 p =0.04; CD and ED, t= 3.865 p =0.00). 16 A Mann- Whitney test confirms that the amount transferred to the recipient by agents and principals in the ED treatment are statistically different (z=3.252 p=0.00). 17 A clustered OLS regression with the average given amount per principal as a dependent variable and baseline and compulsory treatments as independent variables gives us only one significant coefficient at a 1% significance level, the one associated to the CD treatment: -1.071 (p= 0.00). This hints that recipients in the CD treatment receive less money than in the ED or BS treatments. 18 See Table A1 in Appendix A for more details. 19 Figure A1 in Appendix A, shows a histogram dividing the principals by number of times that they decided not to delegate. We observe that the distribution is very close to a normal distribution and that subjects choose to delegate in roughly half of the cases (5.98 is the mean amount of times that one subject does not delegate). 12

where agents compete by giving lower amounts to recipients, the situation seems to change when ED is implemented. In line with this, those principals who delegate less earn more. 20 Table 2: Percentage of delegated decisions and corresponding amount reallocated per group of rounds. Rounds Allocation Decision Average amount shared Principal Agent Principal Agent (1-4) 51% 49% 4.31 3.91 (5-8) 48% 52% 3.66 2.97 (9-12) 47% 53% 3.5 2.60 Agent selection The average shared amount by agents that principals do not choose on the next round in CD is 3.88, well above the average amount shared by those who are selected again, 1.81. In ED principals seem to react less to lower amounts. Principals switch from an agent to choosing by themselves when the amount reallocated is on average 4.11, an amount significantly above 3.22 that is the average amount transferred on rounds after which principals do not change their strategy. Beginning from round 1 principals could choose between two agents in CD and two agents or not delegating the decision in ED. Previous literature states that principals are selfish and thus select those agents who share less with the recipients. In doing this, they shift their responsibility over the unfair outcome to the agent.this statement fulfils in CD where principals 20 Figure A2 in Appendix A, shows that there is a clear tendency regarding the average amount allocated to the recipient by number of times that a person decides not to delegate in the ED treatment. A t-test confirms that the average amount transferred by people who delegate in more than six rounds is statistically different from the quantity transferred by those who choose to delegate in less than six rounds (t= 2.914, p=0.00). Principals who delegate more earn more. 13

switch agents when an agent shares more with the recipient. Table 3 present a series logistic regressions (clustered by subject) for CD and ED treatments 21. Model 1 and Model 2 analyse the CD data, their dependent variable is a dummy with value one if the principal decides to switch agents after that round. In Models 3, 4, 5, 6 the data examined is the ED one. Model 3 and 4 have as dependent variable a dummy with value one if principals switch from delegating to not delegating, while the dependent variable in Model 5 and 6 is a dummy with value one if the agent changes the decision maker in any way (from agents to principal or from one agent to another) from one round to another (including change in agents). The explanatory variables are the same for all the models: the amount allocated to recipients on the previous period and the rounds (only on models 2, 4 and 6). Table 3: Switching in round t based in round t-1 CD ED Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Amount allocated to 0.28*** 0.29*** 0.08*** 0.08*** 0.13 0.13 recipients on the (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) previous round Round 0.05-0.01-0.02 (0.30) (0.74) (0.23) Constant -1.29*** -1.63*** -1.13*** -1.08*** -0.32*** -0.15 (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) Observations 187 187 649 649 649 649 (17) (17) (59) (59) (59) (59) Log likelihood -99.46-110.57-395.88-395.84 434.28-433.65 Pseudo R-squared (0.09) (0.10) (0.00) (0.01) (0.00) (0.00), where the number in parenthesis represents the total amount of principals observed rather than the amount of observations. *** p<0.01, ** p<0.05, * p<0.1 21 We excluded the last round from the regressions to avoid the end game effect. 14

In Models 1 and 2 the variable amount allocated to recipients on the previous round is positive and significant (0.28 and 0.29 respectively) at a 1% level. This indicates that in CD principals switch agents in a round when the previously selected agent allocated higher amounts to the recipient in the previous round. Models 3 and 4 present a lower coefficient associated to the amount given in previous periods by agents (0.08), this coefficient is significant at a 1% level. Principals switch from delegating to not delegating if the amounts given in the previous round were low. Meanwhile, Models 5 and 6 indicate that in ED higher amounts reallocated to the recipient in a round mean a higher likelihood of a change in strategy in the next round. Note that the size of the coefficient associated to the amount transferred (0.13) is smaller than in the CD treatment. This hints that in CD principals react more to higher amounts reallocated than in ED. The coefficient associated to the round is never significant. This result is in line with the ones obtained in previous literature (Hamman et al. 2010; Bartling and Fischbacher, 2012) where they argue that principals select those agents who share less with recipients as they can shift the blame of not being fair towards agents. Still, the coefficients associated to the amount shared are smaller for ED regressions than for CD. In CD principals are more prone to switch agents if the amount earned is small, this hints that competition between agents in CD is greater than in ED. Agents in CD understand that principals switch agents when they transfer more to recipients and thus start transferring lower amounts each round. In ED this is not the case. Principals also switch their strategy when they get lower amounts, but in a more moderate way. Agents do not seem to realize about the relationship between lower amounts and switching strategy in ED and therefore do not use allocating lower amounts to recipients as a strategy to be selected by agents over time (see Table 2). Questionnaires Subjects filled a questionnaire stating what they thought about their beha- 15

vior and the behavior of others. 22 All the questions were ranked using a seven item scale from -3 (very bad) to +3 (very good). Interestingly, recipients asked to evaluate the behavior of principals gave them 0.10 points in the in BS treatment, 0.50 in ED and -0.23 in CD. Recipients evaluate principals better in the ED than in any of the other treatments. However, when principals have to evaluate their own behavior with the same scale they give themselves 2.25 in BS, 1.59 in ED and 1.66 in CD, hinting that they do judge their behavior worst in ED than in BS. In addition to this questionnaire, they filled a three scale CRT test (Frederick, 2005). This test hints that principals with higher CRT scores select agents who allocate less to recipients in the CD treatment but not in BS or ED treatments (Table A3 Appendix A). 23 In the ED those with lower CRT (0) delegate less (47%) than principals with higher CRT (1, 2, 3) (52%). 5 Conclusions Previous literature mainly focuses on compulsory delegation (Hamman et al. 2010) finding that principals act as profit maximizers under this structure opposed to their behavior on a simple dictator game where they tend to show a more altruistic behavior with recipients. Both BS and CD treatments results are consistent with this existing literature. However, we find that delegation does not increase inequality between principals and recipients on a hierarchical structure where delegation is endogen- 22 Table A2 in Appendix A gives the average results by role and treatment for each of the questionnaires questions. 23 A Mann-Whitney Rank sum test confirms that when principals have higher CRT scores they select the agent transferring less amount (p=0.000). Meanwhile, there are no significant allocation differences by the principals CRT score in Baseline (p=0.387) or ED (p=0.409) treatments. The behaviour in CD is in line with literature stating a negative relationship between CRT scores and amount transferred to recipients in standard dictator games (Ben-Ner et al. 2004). Meanwhile, BS and ED behave as predicted by other studies on which the negative relationship between transferred amount and CRT over time is not so clear (Ponti and Rodriguez-Lara, 2015). 16

ous. The decisions taken under this mechanism converge to the ones taken by principals when delegation is not possible and principals must make the choice. This specially contradicts the findings of Hamman et al. (2010) where endogenous delegation after eight periods of compulsory delegation gives higher profits for principals. We could argue that these results are due to endogenous delegation being implemented after eight periods of compulsory delegation. We also observed that agents behave differently in CD and ED, where they shared more with recipients. This could be explained by the endogenous mechanism or by the different competitive structures of both games. We ruled out any possible competition effect that could explain this results implementing the endogenous delegation without information treatment (ED- 2) on which agents did not know that they were competing also with the principal. The results of this treatment is equal to the results in ED-1, suggesting that is the endogenous mechanism the one affecting agents behavior. Furthermore, our results are similar to the ones obtained by Choy et al. (2015). They found that endogenous delegation gives more equalitarian outcomes than compulsory delegation on a bargaining ultimatum game environment. This two results hint that contrary to what previous literature predicts delegation is not always used to generate unfair outcomes. When delegation is optional, it yields the same result as when there is no delegation. One explanation can be found in Hoffman et al. (1996) where they show that increasing social distance lowers the amount reallocated in a dictator game. In compulsory delegation an agent is imposed increasing the social distance with respect to the standard dictator game. This results in prosocial motives being removed and lower quantities being transferred. However in ED social distance is weaker as the principal can choose not to delegate. The results of ED show that this distance is effectively weaker as the amounts redistributed are higher. In addition, Dana et al. (2006), Dana et al. (2007) and Andreoni and 17

Bernheim (2009), find that subjects do not always want to face the outcome of their actions even if they know the results. In the CD treatment principals do not directly choose the unfair outcome and they do not have to face the earnings of the recipient (even if they can easily calculate them). Therefore, they choose to be blind to the fact that selecting an unfair agent again will probably yield more unfair outcomes. This choice to be blind is more difficult in the ED treatment where they can effectively avoid the unfair situation and where they certainly see the effect of their actions on the recipient. Grossman (2014), claims that when the choice of remaining ignorant is more salient subjects choose to know the outcome more often and this somehow happens here. Principals could actively avoid the unfair outcome in ED and this made the blame shifting mechanism less effective for principals. Moreover, half of the decisions are delegated and half taken by the principal when possible. Our research is limited to one specific environment and the decision that the agent faces is always the same. Future research should investigate if when decisions are different principals still choose to delegate in over half of the cases. Other studies should focus on why agents seem to stop competing under ED. Agents in CD lower the amount transferred to the recipient in order to attract principals and compete with other agents but they do not do this in ED even though results show that lower reallocated amounts increase the likelihood of being selected again. Another important aspect is that the nature of delegation mixed with certain characteristics of principals predicts certain behaviors. Especially in CD where principals with lower CRT scores tend to choose agents who share less with recipients, this is in line with previous research stating that there is a negative relationship between CRT and amounts transferred in dictator games (Ben Ner et al. 2004). In conclusion, our results indicate that the nature of the delegation (being endogenous or exogenous) varies the outcome. When delegation is optional the decisions taken are very close to the choices selected by principals when there is no delegation. Under this mechanism decisions tend to be more 18

equalitarian than those taken under exogenous delegation where agents hired by principals divide the endowment. 6 References Andreoni, J., & Bernheim, B. D. (2009). Social image and the 50-50 norm: A theoretical and experimental analysis of audience effects. Econometrica, 77(5), 1607-1636. Bartling, B., & Fischbacher, U. (2011). Shifting the blame: On delegation and responsibility. The Review of Economic Studies, rdr023. Ben-Ner, A., Kong, F., & Putterman, L. (2004). Share and share alike? Gender-pairing, personality, and cognitive ability as determinants of giving. Journal of Economic Psychology, 25(5), 581-589. Bottino, E. & Kujal, P. (2016). Gender Biases in Delegation. Work in progress. Branas-Garza, P. (2007). Promoting helping behavior with framing in dictator games. Journal of Economic Psychology, 28(4), 477-486. Camerer, C. (2003).Behavioral game theory: Experiments in strategic interaction. Princeton University Press. Cardenas, J. C., & Carpenter, J. (2008). Behavioural development economics: lessons from field labs in the developing world. The Journal of Development Studies, 44(3), 311-338. Cettolin, E., & Riedl, A. (2010). Delegation in decision making under uncertainty. Are preferences incomplete? Mimeo, Maastricht University. Charness, G., & Gneezy, U. (2008). What s in a name? Anonymity and social distance in dictator and ultimatum games. Journal of Economic Behavior & Organization, 68(1), 29-35. Charness, G., Cobo-Reyes, R., Jimnez, N., Lacomba, J. A., & Lagos, F. (2012). The hidden advantage of delegation: Pareto improvements in a gift exchange game. The American Economic Review, 2358-2379. Choy, A. K., Hamman, J. R., King, R. R., & Weber, R. A. (2015). Delegated bargaining in a competitive agent market: an experimental study. Journal 19

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7 Appendix A Table 1: Summary of the experimental design BS and CD BS and ED CD and ED (1-4) z = 1.067 z = -0.246 z = -0.930 P-value= 0.286 P-value = 0.805 P-value= 0.352 (5-8) z = 2.256 z = 0.401 z = -1.930 P-value = 0.024 P-value= 0.688 P-value =0.053 (9-12) z = 2.532 z = 0.505 z = -2.320 P-value= 0.011 P-value= 0.6132 P-value= 0.0204 Note: Using the Bonferroni correction at a 5% level only the comparison between CD and ED on periods 9-12 would be not significant Figure 1: Number of times that each principal chooses not to delegate. 22

Figure 2: Average amounts transferred to the recipient by number of times that the subject decided not to delegate. 23

Table 2: Seven item scale, form strongly disagree (-3) to strongly agree (+3) with a neutral option (0) BS CD ED Player A B A B C A B C I feel involved 1.8-0.78 0.17-0.82 1.10 1.30-0.59-0.27 in this experiment Total profit obtained 1.11 1.52 1.57 0.05 0 1.22 0.84 0.03 was relevant for me I consider my 2.25 2.68 2.64 1.82 2.87 1.66 2.13 1.64 behaviour acceptable Players A with which I intreacted had - 0.10-0.23 0.70 0.50 0.44 an acceptable behaviour Players C with which I interacted had - 1.42 1.05 an acceptable behaviour I am ready 1.46 1.73 1.94 1.76 2.30 1.35 1.86 1.86 to take risks Table 3: Amount transferred by treatment for Low (0) or high (1-2-3) CRT score subjects. CRT Low (0) High (1,2,3) BS 3.32 3.76 CD 3.16 1.87 ED 3.49 3.25 24

8 Appendix B Figure 1: Average amounts transferred to the recipient by round in CD-ED extra treatment Notice that subjects played CD from round 1-6 and ED from round 7-12. 9 Appendix C: Instructions Treatment 1: Dictator Game Thanks for participating in the experiment! Please remember that from this moment on and till the end of the experiment no communication is permitted. If you have a question at any moment please raise your hand and we will answer your question in private. All identities in this experiment are anonymous. No one in the experiment will get to know your identity during or after the experiment. Your identity will only be used to ensure that you are paid correctly. Please read the instructions with care. After reading them and before starting the game we will provide each participant with a graphical example of the experiment. You will be paid at the end of the experiment. During the experiment we 25

will use the term experimental money (EM) to refer to your earnings. At the end of the experiment we will transform this amount in the local currency using an exchange rate of 1. Notice that we will add 5 EM show up fee to your experimental earnings. Your earnings are your private information. Experiment: The experiment has twelve periods. The structure of the experiment is the following. There are two types of players in this experiment: player A and player B. At the start of the experiment you will be assigned a personal identification number by the computer. Whether you will be Player A or B is determined (randomly) by the computer. In each period, each player A is randomly paired with a player B. Each pair, A-B, will be assigned 10 EM. We will now explain the structure of the game. Each period: At the start of each period, player A decides how to allocate 10 EM to player B and herself. The allocations can be made in increments of 1 cent of EM. The amount of 10 EM will be fully allocated between players A and B. That is, the amount assigned to player B plus the amount player A decides to keep will always add to 10 EM. Once player A has taken their decision, each player will be informed about the amount they have been assigned. At the end of each period all players, A and B, will see the information regarding current and previous periods, the identification numbers of their pairings and the amount assigned to them in each period. Payment: Besides the 5 EM show up fees, each particiant will be paid in the following manner. At the end of the experiment one of the periods will be randomly chosen for each player A and B. Each player will be paid the amount they earned in that period. In addition, subjects will earn 2 EM for completing two short questionnaires You will be called individually at the end of the experiment to be paid. You will inform the experimenter about you ID number and will be paid 26

accordingly. Any questions? Treatment 2: Endogenous Delegation (ED-1 ) Thanks for participating in the experiment! Please remember that from this moment on and till the end of the experiment no communication is permitted. If you have a question at any moment please raise your hand and we will answer your question in private. All identities in this experiment are anonymous. No one in the experiment will get to know your identity during or after the experiment. Your identity will only be used to ensure that you are paid correctly. Please read the instructions with care. After reading them and before starting the game we will provide each participant with a graphical example of the experiment. You will be paid at the end of the experiment. During the experiment we will use the term experimental money (EM) to refer to your earnings. At the end of the experiment we will transform this amount in your currency using an exchange rate of 1. Notice that we will add 5 EM show up fees to your experimental earnings. Your earnings are your private information. Experiment: The experiment has twelve periods. The structure of the experiment is the following. There are three types of players in this experiment: player A, player B and player C. At the start of the experiment you will be assigned a personal identification number by the computer. The computer will also inform you regarding the type of player you have been chosen to be. In each period, each player A is randomly paired with a player B. There will also be two C players. At the start of the period 10 EM will be assigned to each pairing (A-B). We will now explain the structure of the experiment. 27

Each period: Player As screen will show two boxes. Each box contains one of the two Players C and the option Myself. Each player A has to select if the decision of dividing the experimental money is taken by one of the two C players or by player A (option Myself). To select an option,player A simply needs to click on the associated box. If A chooses player C, then player C decides how to divide the 10 EM between each pair of players A and B. The allocations can be made in increments of 1 cent. The amount of 10 EM will be fully allocated between players A and B. That is, the amount assigned to player B and player A always adds to 10 EM. The allocation made by player C to a pair (A,B) is independent of the allocation made to another pair (if player C has been chosen by more than one player). If a player C has not been chosen by any player (A) then their screen will show a waiting message. If Player A chooses the option Myself, the division of the money will be done by A. Once all players have made their decisions, each player A and B will then be informed about the amount they have been assigned. In addition, all players will see a table containing all the information regarding previous periods. Once all players A have made their decisions, player C is informed about the number of players A who have chosen him. Each decision maker (A or C) decides how to allocate 10 EM between players A and B. The allocations can be made in increments of 1 cent. The amount of 10 EM will be fully allocated between players A and B. That is, the amount assigned to player B and player A always add to 10 EM. Payment: Besides the 5 EM show up fees, each participant will be paid in the following manner. At the end of the experiment one of the periods will be randomly chosen for each player A and B. Each player will be paid the amount they earned 28

for that period. That is, this will be the amount that was allocated to them by player C in that period. At the start of the experiment each player C is given an additional quantity of 5 EM However, player C loses 0.30 EM in each period and earns 0.15 EM for each player that selects him. Player Cs earnings are the total sum of the earnings in the entire experiment. You will be individually called at the end of the experiment to be paid. You will inform the experimenter about you ID number and you will be paid accordingly. Any questions? Treatment 3: Endogenous Delegation without Information (ED-2) Thanks for participating in the experiment! Please remember that from this moment on and till the end of the experiment no communication is permitted. If you have a question at any moment please raise your hand and we will answer your question in private. All identities in this experiment are anonymous. No one in the experiment will get to know your identity during or after the experiment. Your identity will only be used to ensure that you are paid correctly. Please read the instructions with care. After reading them and before starting the game we will provide each participant with a graphical example of the experiment. You will be paid at the end of the experiment. During the experiment we will use the term experimental money (EM) to refer to your earnings. At the end of the experiment we will transform this amount in your currency using an exchange rate of 1. Notice that we will add 5 EM show up fees to your experimental earnings. Your earnings are your private information. Experiment: The experiment has twelve periods. The structure of the experiment is the following. There are three types of players in this experiment: player A, player B and player C. 29

At the start of the experiment you will be assigned a personal identification number by the computer. The computer will also inform you regarding the type of player you have been chosen to be. In each period, each player A is randomly paired with a player B. There will also be two C players. At the start of the period 10 EM will be assigned to each pairing (A-B). We will now explain the structure of the experiment. Each period: Each player A has to decide to delegate or not the decision of dividing the endowment on one of the two C players. To select an option, Player A simply needs to click on the associated box. If A chooses a player C, then player C decides how to divide the 10 EM between each pair of players A and B. The allocations can be made in increments of 1 cent. The amount of 10 EM will be fully allocated between players A and B. That is, the amount assigned to player B and player A always adds to 10 EM. The allocation made by player C to a pair (A, B) is independent of the allocation made to another pair (if player C has been chosen by more than one player). If a player C has not been chosen by any player (A) then their screen will show a waiting message. Once all players have made their decisions, each player A and B will then be informed about the amount they have been assigned. In addition, all players will see a table containing all the information regarding previous periods. Once all players A have made their decisions, player C is informed about the number of players A who have chosen him. Each decision maker (A or C) decides how to allocate 10 EM between players A and B. The allocations can be made in increments of 1 cent. The amount of 10 EM will be fully allocated between players A and B. That is, the amount assigned to player B and player A always add to 10 EM. Payment: 30