Inequality aversion, self-interest and social connectedness

The amount we give often depends on how closely connected we are to those we are giving to. However, economic models typically ignore the impact that social connections have on giving behaviour. To address this, this paper proposes a utility function which intertwines preferences relating to social connectedness with inequality aversion and self-interest. This model is tested using behaviour observed in a modified three-person dictator game from an incentivised lab-in-the-field experiment in Uganda (n=156). Preference parameters are estimated at the individual-level and the Dirichlet distribution is used to flexibly model ‘noise’ in decision making. Results show that social connectedness has large and significant effects on giving; with distinctions between self-other and between-other trade-offs emerging. Giving behaviour is found to be complex and extensively heterogeneous, yet, the model proposed explains and fits the observed behaviour well.