The psychology and economics of exclusion

Alex Imas, Kristóf Madarász 22 August 2020

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Protectionism, nationalism, left- and right-wing populism are on the rise all over the world. Although the meaning of these terms is debated, they are naturally built around the idea of exclusion: exclusion from markets, institutions, fundamental rights, or from moral worth.

While prior research has looked at instrumental reasons for why people may adopt these attitudes, this work struggled to rationalise the extent to which people support exclusionary policies even at an apparent material cost to themselves. After all, the very idea behind globalism is that a rising tide lifts all boats. For example, in their recent survey article, Guriev and Papaioannou (2020) argue that economic losses alone such as those, "due to cross-border trade, automation, crisis and austerity cannot fully explain the rise of populism." This finding is in line with the results of Mutz (2018) who, tracking the same voters, studies attitudes that correlate with the increased support for the Republican presidential candidate from 2012 to 2016 (Mitt Romney versus Donald Trump). She finds that pocketbook concerns—i.e. being left behind economically—cannot explain the shift. Instead, candidate preferences in 2016 reflected "anxiety among high-status groups rather than complaints about past treatment among low-status groups. Both growing domestic racial diversity and globalization contributed to a sense that white Americans are under siege by these engines of change." These results suggest that understanding the underlying psychology driving such attitudes may be key for economics and political science.

In a recent paper (Imas and Madarasz 2020), we introduce and formalise a potentially fundamental psychological force that not only rationalises seemingly paradoxical attitudes towards exclusionary policies, but helps explain properties of markets and institutions that employ exclusion as a tool for rent-seeking. Our premise is that the value that a person attaches to consuming an object or possessing an attribute is not simply a matter of intrinsic utility, but increases in others' unmet excess desire for it. This comparative motive, which we term mimetic dominance seeking, is imitative in that one's desire for an object or attribute mirrors the desires of others for it. The motive is about dominance in that the unmet nature of such desires is key for boosting value.

This motive links broadly to the ideas of classic political theorists such as Hobbes (1647) and Rousseau (1775) who describe a form of superiority seeking over others, which Rousseau terms “amour propre”, as an aspect of human sociability that is key for the understanding of politics. More recently, Dr. Martin Luther King talked about a “universal drum major instinct” in a similar vein. We argue that economic contexts naturally generate such comparative superiority seeking over the unmet desires of others. By developing a portable structure to this idea, our framework facilitates the study of its implications for competition, exchange, or political economy.1

We show that mimetic dominance leads to a reluctance to trade and a direct preference for objects that become scarcer. The latter generates a motive for exclusion: all else equal, a person enjoys consumption of a good or the possession of an attribute if she knows that others would like to consume it more, but cannot. This has significant implications for markets. For example, in the classic monopoly setting, a seller with identical copies of a good benefits from randomly excluding a fraction of potential buyers and denying them access, a feature common in the practice of scarcity marketing.

In the context of selling a private good via a first-price auction, mimetic dominance implies that holding the number of active bidders constant, bidding becomes more aggressive the greater the number of potential buyers randomly barred from the opportunity of acquiring the good. Mimetic dominance seeking counteracts the force from classic auction theory that predicts lower revenue as the number of active bidders in competition for a private good decreases. Under a broad set of conditions, explicitly barring a person from the auction will increase the seller’s expected revenue, and it may do so even more than increasing the size of the bidding pool in the case of full inclusion.

We conduct two experiments to provide direct evidence and measure the intensity of the mimetic motive in basic exchange. The first employs a first-price, sealed-bid auction. People formed groups of various sizes and could potentially submit bids for a single good unique to the experiment—a custom T-shirt. There were three treatments. In the baseline condition, everyone in a given group could submit a bid. In the random exclusion treatment, some people were randomly and publicly excluded from the opportunity to submit a bid before the auction started. In the non-random exclusion treatment, people first submitted ratings of how much they desired the good. Potential bidders were not randomly excluded; rather, people with the lowest reported desire for the good were barred from participating. All of this was public knowledge.2

The desire for mimetic dominance predicts that those in the random exclusion treatment will submit higher bids than those in the baseline and non-random exclusion treatments. Bidders in the former knew that those who were excluded may have a greater unmet desire for the good. Despite the similarity in procedures, this mimetic dominance motive is absent in the non-random exclusion treatment because bidders knew that those who were excluded had a lower desire than their own. Our findings are consistent with these predictions: despite the lower number of active bidders competing against each other, average bids and expected revenue were higher in the random exclusion treatment than in the baseline treatment. Despite the positive selection of intrinsic values, the same was true vis-à-vis the non-random exclusion treatment. As shown in Figure 1 and Figure 2, excluding a potential bidder has nearly double the positive impact as adding an additional bidder to the baseline treatment under full inclusion, i.e. the standard competition channel.

Figure 1 Average bids by number of active bidders, random exclusion versus baseline treatments (top) and non-random exclusion versus baseline treatments (bottom)

Note: Initial group size is the same as the number of active bidders in the baseline, and corresponds to 4, 6, and 8, when the number of active bidders are, 3, 4, and 5 respectively in the other treatments.

Figure 2 Expected revenue by number of active bidders, random exclusion versus baseline treatments (top) and non-random exclusion versus baseline treatments (bottom)

Note: Initial group size is the same as the number of active bidders in the baseline, and corresponds to 4, 6, and 8, when the number of active bidders are, 3, 4, and 5 respectively in the other treatments.

Our second experiment sought to further pin down the mechanism. In this study, people did not compete with each other but reported their maximum willingness to pay for a good: if given the opportunity, each participant could in principle obtain an identical copy of the private good. Participants were randomly assigned into either the baseline or random exclusion treatment. In the former, everyone could submit a willingness to pay (WTP); while in the latter, some people were randomly barred from participating in the sale. Those who had the opportunity to purchase obtained the good if their WTP exceeded a randomly drawn (but initially unknown) common price. Our framework predicts that the prospect of unmet excess desire of others in the random Exclusion treatment will boost the valuations of those who do have the opportunity to purchase.  Figure 3 displays the WTP results by treatment. Consistent with our prediction, exclusion increased valuations by nearly 50 % compared to the baseline treatment.

Figure 3 Willingness to pay by treatment, means and with standard errors (top) and the distribution of reported valuations (bottom)

Mimetic dominance has broad implications for many aspects of social life including topics in political economy such as attitudes towards redistribution, immigration, and trade. Many are puzzled by the persistent opposition to redistributive policies amongst groups who would materially benefit from them. Researchers have posited that such attitudes could be driven by beliefs about upward mobility (Benabou and Ok 2001) or through motivated beliefs (Benabou and Tirole 2006). Mimetic dominance provides a complimentary mechanism that generates distinct forms of opposition to aspects of redistribution. For example, it predicts that opposition to redistribution to the poorest may be particularly strong amongst the poor-but-not-poorest individuals. Without redistribution, this group derives utility from the fact that those in the rung below them crave but do not have access to the material and immaterial benefits that they have. Consistent with this, Kuziemko et al. (2014) report survey evidence that it is people just one notch above the minimum wage threshold who have the greatest opposition to increasing it, even after controlling for instrumental reasons such as fear of job loss.

Through similar intuitions, our logic generates opposition to inter-group trade and immigration even in the presence of material benefits. The framework helps rationalise opposition to immigration amongst the recently immigrated. Recent research in stratification economics has argued that racial or ethnic discrimination is driven by instrumental factors as social groups compete over relative positions in a social hierarchy (Darity et al. 2015). Our findings imply that even if those instrumental motives are relaxed, people may continue to support policies that enact exclusion. The value of having access to certain goods is tightly linked to the comparative lack that others experience by not having access to them. Even if preferences are distributed identically across groups, exclusion based on salient characteristics such as race or ethnicity facilitate mimetic dominance seeking by members of the favoured group.

Together, our results document a powerful psychological force shaping exchange. This force impedes trade and generates a motive for social exclusion. We believe that understanding factors that influence mimetic dominance, moderate its influence on behavior, or channel it from one domain to another, is important for addressing the types of issues highlighted by the current moment.

References

Benabou, R and E Ok (2001), “Social Mobility and the Demand for Redistribution: The Poum Hypothesis”, Quarterly Journal of Economics 116(2): 447–487.

Benabou, R and J Tirole (2006),  “Belief in a Just World and Redistributive Politics”, Quarterly Journal of Economics 121(2): 699–746.

Darity, W, H Darrick and J B Stewart (2015), “A Tour de Force in Understanding Intergroup Inequality: An Introduction to Stratification Economic”, Review of Black Political Economy 42: 1-6.

Girard, R (1966), Deception, Desire and the Novel: Self and Other in Literary Structure, Baltimore: Johns Hopkins Univesity Press.

Guriev, S and E Papaioannou (2020), “The Political Economy of Populism”, SSRN Working Paper.

Hobbes, T (2016), On the Citizen, Translation by R. Tuck and M. Silverthorne, Cambridge  University Press, originally published 1647.

Imas, A and K Madarasz (2020), “Mimetic Dominance and the Economics of Exclusion: Private Goods in Public Context”, CEPR DP 15016.

King, M L (1968), “The Drum Major Instinct”, Sermon Delivered at Atlanta’s Ebenezer Baptist Church.

Mutz, D (2018), “Status threat, not economic hardship, explains the 2016 presidential vote”, Proceedings of the National Academy of Sciences 115(19): E4330--E4339

Rousseau, J-J (1984), Discourse on Inequality, Translation by M Cranston, Harmonds Penguin Books, originally published 1755.

Endnotes

1 On the idea of mimetic desire, see the work of the literary scholar Rene Girard, e.g., Girard (1966).

2 Otherwise the experiment proceeded exactly as in the random exclusion treatment.

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Topics:  Frontiers of economic research Politics and economics

Tags:  psychology, Economics, exclusion, populism

Assistant Professor of Behavioral Science and Economics, University of Chicago Booth School of Business

Associate Professor of Managerial Economics, LSE

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