Understanding the development and role of norms and preferences : essays in behavioural and applied microeconomics

Fundamental to Economics is an understanding of how individuals make decisions when constrained. Individuals must decide over what to consume and how much of it on a daily basis: from which goods to buy to how much to donate to a charity or how much time should be spent in leisure. At the root of all those decisions is the hypothesised utility function and the underlying preferences it represents. These preferences, their stability and their formation, are the focus of this thesis. The first two chapters take a structural choice-revealed preference approach to analyse social preferences. The third chapter seeks to understand when preferences begin to emerge and affect economic decision-making. Whilst these papers are disparate in their contexts and techniques, they are unified by a primary focus on the underlying role preferences play in economic decision-making. Chapter 1: This chapter examines how preferences depend on context. More specifically, it focuses on whether preferences over donation decisions to a not-for-profit remain stable as the visibility of a donation and the relevance of the not-for-profit changes. This chapter finds that preferences over donations are context-dependent, depending on the degree of anonymity of the not-for-profit. The data come from a laboratory experiment of a dictator game with a 3x2 treatment layout - on the first dimension the degree of visibility of the donation changes, and on the second dimension the relevance of the not-for-profit to the prospective donor changes. In contrast to most experimental papers, the observed data are not directly analysed; instead the data are used to partially-identify the underlying parameters of the participants. The impact of context on donation decisions is directly tested by measuring how the average estimated parameters shift as context changes. Increased donation visibility increases the emphasis agents place on both utility derived from altruism and utility from social image or pressure. This evidence is stronger when agents are assumed to be comparing their choices to their expectations of others' choices, rather than comparing choices to the more common 50-50 social norm. Chapter 2: In contrast to the first chapter, this chapter looks both at underlying preferences and how individuals learn over the preferences of others. Examining a sequence of one-shot Prisoner's Dilemma games, this chapter ultimately reveals individuals to be pessimistic in their beliefs over others and envious in their social preferences. The data in this chapter comes once again from the laboratory, but instead focuses on the finitely-repeated Prisoner's Dilemma. It adopts the same structural revealed-preference approach used in the first chapter to evaluate models of learning - from Bayesian updating to a pessimistic, asymmetric updating rule - and underlying preferences. In fitting with perceptions of Economics as the 'dismal science', it is evident that most individuals are pessimistic in their beliefs over the actions of others: they will negatively update beliefs over the likelihood of facing an agent who cooperates when they observe an agent who defects, but do not update beliefs positively in the face of cooperation. When their own underlying preferences are examined, it is evident that a combined model of inequality aversion and altruism rationalise most behaviour; somewhat counter-intuitively, though, those who cooperate the least are not, on average, the most self-interested but the most inequality-averse, suggesting that envy could be the primary driver of defection in the Prisoner's Dilemma game. Chapter 3: Despite deviating from the previous chapters substantially in context and techniques used, this chapter retains the same focus on underlying preferences. In this instance, however, the focus is on the emergence of underlying preferences and norms as a basis for economic decision-making. This chapter uses a unique dataset on labour choices made by children at KidZania London, which provides a real-world, closed economy for children. Over 130,000 children are observed making fully-incentivised labour decisions from as young as four on school visits to KidZania between 2015 and 2017. Using this data, augmented with data obtained from the Department of Education and the Office of National Statistics, the chapter answers the following research question: what drives economic decision-making during childhood and what patterns likely persist into adulthood? By observing labour market decisions made in a closed economy with all individuals facing an identical choice set, any divergent trends must be due to underlying norms and preferences. As this is the first time the data are being analysed, a series of stylised facts are first established: i) girls earn more than boys, ii) girls earn more by working longer, whereas boys earn more per minute on average, iii) girls opt for female-dominated occupations and boys for male-dominated occupations and iv) gendered patterns of behaviour are both early in onset (from age 4) and persistent in effect (with patterns observed through to age 14). These stylised findings are supported by modelling of occupational demand, suggesting that gendered preferences or norms are internalised from an early age and persistently drive economic decision-making from age four. The effect of socioeconomic status is weaker and less persistent than the effect of gender. Gendered preferences or norms are unique in both the strength of influence and their early onset.