Behavioural economics and small states : a focus on social preferences

Abstract

The growing application of psychological principles to Economics has created an expanding literature in Behavioural Economics which explores how humans decide and behave in economic situations. A key contribution has been to show that deviations from the assumption of self-interested, cost-benefit maximising individuals with stable preferences are not only common, but systematic. Social preferences like trust, inequality aversion, altruism and reciprocity present some of the most widely studied influences in various real-world policy contexts. But the application of such ideas to issues faced by small states has received scant attention, even though recent years have witnessed a similarly thriving research agenda in the economics of small states. This paper seeks to address that gap by juxtaposing some of the findings from the behavioural economics literature on social preferences with those emerging from the economics literature on small states and complementing the insights with fresh data linking social preferences with population size. We synthesize the evidence from the literature and data into stylised facts which indicate that certain social preferences may indeed be stronger in small states. We discuss some of the implications of these findings for policy and future research.