We conduct an experiment to demonstrate the importance of sorting in the context of social preferences. When individuals are constrained to play a dictator game, 74% of the subjects share. But when subjects are allowed to avoid the situation altogether, less than one third share. This reversal of proportions illustrates that the influence of sorting limits the generalizability of experimental findings that do not allow sorting. Moreover, institutions designed to entice pro-social behavior may induce adverse selection. We find that increased payoffs prevent foremost those subjects from opting out who share the least initially. Thus the impact of social preferences remains much lower than in a mandatory dictator game, even if sharing is subsidized by higher payoffs…
A big example of generosity inducing institutions causing adverse selection is market transactions with poor people.
For some reason we hold those who trade with another party responsible for that party’s welfare. We blame a company for not providing its workers with more, but don’t blame other companies for lack of charity to the same workers. This means that you can avoid responsibility to be generous by not trading with poor people.
Many consumers feel that if they are going to trade with poor people they should buy fair trade or thoroughly research the supplier’s niceness. However they don’t have the money or time for those, so instead just avoid buying from poor people. Only the less ethical remain to contribute to the purses of the poor.
Probably the kindest girl in my high school said to me once that she didn’t want a job where she would get rich because there are so many poor people in the world. I said that she should be rich and give the money to the poor people then. Nobody was wowed by this idea. I suspect something similar happens often with people making business and employment decisions. Those who have qualms about a line of business such as trade with poor people tend not to go into that, but opt for something guilt free already, while the less concerned do the jobs where compassion might help.