494 American Economic Review: Papers & Proceedings 2008, 98:2, 494���499 http://www.aeaweb.org/articles.php?doi=10.1257/aer.98.2.494 The disparity in the performance of econ- omies and the persistence of disparate economies through time have not been satisfactorily explained by development economists. ��� what has been missing is an understanding of the nature of human coordination and cooperation. Douglass North (1990, 11) Effective institutions for contract enforce- ment and collective action are probably among the most important conditions for successful economic and social development. However, in many developing countries these institutions are weak and agreements lacking formal third- party enforcement are ubiquitous. Under these conditions, endogenous contract enforcement and the ability of private parties to solve the cooperation and coordination problems inher- ent in collective action are key. A large body of experimental evidence suggests that social pref- erences are vital to solving such problems.1 In particular, the willingness to punish cheaters in informal agreements, even at a net cost to the punisher, substantially reduces cheating (Fehr, G��chter, and Georg Kirchsteiger 1997), and the willingness to altruistically punish free riders in public goods greatly enhances the scope of pri- vate parties to solve collective action problems (Fehr and G��chter 2002). Likewise, many peo- ple exhibit a propensity to cooperate conditional on others��� cooperation, even when free-riding 1 See Christopher M. Anderson and Louis Putterman 2006 Jeffrey Carpenter 2007 Fehr and Simon G��chter 2000 Ozgur G��rerk, Bernd Irlenbusch, and Bettina Rockenbach 2006 and Elinor Ostrom, James Walker, and Roy Gardner 1992. ��� Spite and Development By Ernst Fehr, Karla Hoff, and Mayuresh Kshetramade* would maximize their material payoff (Urs Fischbacher, G��chter, and Fehr 2001). In this paper, however, we document that social preferences may also constitute important obstacles to development. We show that spite- ful preferences���the desire to reduce another���s material payoff for the mere purpose of increas- ing one���s relative payoff���are surprisingly widespread in experiments we conducted in one of the least developed regions in India (Uttar Pradesh). Our results suggest that spitefulness diminishes the propensity to cooperate, even in those situations in which mutual cooperation is an equilibrium for selfish players. Finally, we find empirical patterns suggesting that the will- ingness to reduce another���s material payoff��� either for the sake of achieving more equality or for the sake of being ahead���is stronger among individuals belonging to high castes than among those belonging to low castes. The last finding is of particular interest because individuals��� caste status can be consid- ered as exogenous���individuals cannot freely select into different castes but inherit the caste status of their parents.2 For this reason, and because we control for demographic variables such as education, land ownership, and house type, our finding may represent the impact of a caste culture that puts extreme emphasis on the superiority of the high castes and the inferiority of the low castes. It seems quite plausible that such a culture contributes to social preferences such as the motive to be superior in terms of 2 Also, the assignment of different social groups and individuals to the two extreme ends of the caste hierarchy generally occurred so long ago (at least a millennium, pos- sibly two) that any cultural differences across castes at the extreme ends of the caste hierarchy that may have deter- mined that assignment should have by now been erased unless they were reinforced by the socioeconomic regime in which the caste groups have lived. The Indian caste system represents an extreme form of social hierarchy. High castes traditionally could command forced labor from low-caste individuals. Low castes are those groups that have been denied basic rights and were subject to the traditional practice of untouchability. * Fehr: Institute for Empirical Research in Economics, University of Zurich, Bluemlisalpstrasse 10, CH-8006 Zurich, Switzerland (e-mail: efehr@iew.uzh.ch) Hoff: World Bank, 1818 H Street, NW, Washington, DC 204 (e- mail: khoff@worldbank.org) Kshetramade: Affinova, Inc., 52 Second Ave., Waltham, MA 02451 (e-mail: mayurvk@ yahoo.com). We gratefully acknowledge support from the Research Priority Program on the ���Foundations of Human Social Behavior��� at the University of Zurich (Fehr) and from the World Bank (Hoff). We thank Sonal Vats for excellent research assistance.

VOL. 98 NO. 2 495 SPiTE ANd dEVELOPmENT material payoff, even when this comes at a cost to equality and efficiency. I.��� The���Role���of���Spite���in���Cooperation��� and���Punishment In symmetric public goods experiments, players have the same endowment and the same material payoff functions. Free-riders earn a higher material payoff than cooperators in this setting. If a punishment opportunity is intro- duced such that individuals are first informed about other group members��� contributions to the public good, and can subsequently target punishment to specific individuals, many coop- erators punish the free riders (Fehr and G��chter 2002). Such punishment occurs despite the fact that the punisher has to pay for sanctioning others. However, there is also evidence indicat- ing that some free-riders punish the cooperators. For example, in a symmetric one-shot public goods experiment with a punishment opportu- nity (Armin Falk, Fehr, and Fischbacher 2005), roughly 1 percent of the subjects free ride and punish the cooperators. Interestingly, this pun- ishment occurs only if the cost for the punisher is smaller than the cost for the punished subject, i.e., only if the free riders can increase the dif- ference in material payoffs between themselves and the punished subjects. If instead, every $1 invested in punishment reduces the punished subject���s income by $1, spiteful punishment completely vanishes. This finding is consistent with the view that free riders who punish want to increase the payoff difference between them- selves and the cooperators. Social psychologists also have found evi- dence for spiteful preferences (Paul A. M. Van Lange 1999). Van Lange examined the social preferences of more than 2,000 subjects in the Netherlands with the ring test (Wim B. G. Liebrand and Charles G. McClintock 1988) and found that roughly 12 to 1 percent of them are willing to pay for increasing inequality. These subjects prefer, for example, the allocation (480 for self, 80 for other) relative to the allocation (540 for self, 280 for other), thus sacrificing total surplus and equality for the sake of a larger pay- off difference between ���self��� and ���other.��� In a wide variety of settings, spiteful prefer- ences would constitute an obstacle to trade, cooperation, and, thus, development. A spiteful individual is willing to forgo material gains from trade unless the terms of trade give him a large share of the pie. A spiteful individual is also more likely to violate contracts���either by providing low effort or low quality or by a lower willingness to pay the bill���because such contract violations increase the shirker���s payoff at the expense of the trading partner. If spiteful shirking is anticipated, it will further decrease the willingness to trade. A spiteful individual is harder to motivate to cooperate because he has a higher marginal cost of contributing to public goods or joint activities: First, he bears the pecuniary costs like all other individuals and, second, he has a nonpecuniary cost because any contribution may reduce the difference in material payoffs between himself and others. Finally, spiteful punishment also has a detrimental impact on cooperation because it diminishes the net incentive for cooperation that emerges from the punishment of defectors. If defection and cooperation are punished, the potential free-riders have less incentive to coop- erate. In fact, G��chter and Benedikt Hermann (2007) provide evidence from experiments in Russia indicating that punishment opportuni- ties may fail to reduce free-riding because of the punishment of cooperators. II.��� Spiteful���Punishment���in���India We conducted a sequential, one-shot exchange game with third-party punishment in Uttar Pradesh in order to study the potential impact of an extreme social hierarchy on the willingness of disinterested third parties to punish violations of informal agreements. In our experiment, three players���A, B, and C���are involved and have an endowment of 50, 50, and 100 rupees, respectively. Fifty rupees are roughly equal to one day���s unskilled wage. Players A and B par- ticipate in a binary trust game, with A in the role of the trustor and B in the role of the trustee. Player C is the third party who has the option of punishing B. A has to choose whether to keep his endowment (and then the game ends) or to send it to the trustee. If A sends his endow- ment to B, the experimenter triples the amount sent. At this point, B has 200 rupees. He has to choose whether to keep them for himself or to share them equally with the trustor. If B shares the money with A, all three players have 100 rupees before C makes a decision. If B keeps all the money, the distribution before C makes a decision is (0, 200, 100). Player C has more than two options. For every two-rupee coin that C spends on punishment,