Does The ”Samaritan”s Dilemma” Justify The Welfare State?

The ”Samaritan”s dilemma” is the name of a game analysed by economists. It shows how altruistic behaviour can lead to inefficiencies in, for example,people”s savings. The game has, among other things, been used to justify a
welfare state, since such an institution can help avoid the inefficiency.

Writing in the January 2004 issue of the Economic Journal, Johan Lagerlöf argues that the validity of this justification critically relies on the assumption that the players of the game have perfect knowledge about each other”s preferences, an assumption that in most real-world situations is very unrealistic.

What is the Samaritan’s dilemma?
Probably most of us are altruistic in that we would be willing to help out financially if a fellow human being were in need and we were this person”s last resort. The fact that we are willing to help, however, may affect the behaviour
of the recipient: knowing that help will be forthcoming if things turn out badly, the recipient may choose to save less than he otherwise would have done. Economists refer to this situation as the ”Samaritan”s dilemma”. What makes the situation a ”dilemma” from the economist”s point of view is that the recipient’s saving level is inefficient. The inefficiency arises because the anticipated transfer distorts the recipient”s saving choice: every additional
pound he saves induces the altruist to make the transfer, say, ten pence smaller, thereby effectively creating an tax on savings.

Can the dilemma be solved?
One solution to the Samaritan”s dilemma would be if the altruist could force the prospective recipient to save a certain amount. Indeed, many people argue that this is precisely the way a welfare state works. A welfare state involves a social insurance system in which ”saving” (i.e. paying tax) is compulsory. Thus, in contrast to a private insurance system where participation is voluntary, a welfare state can avoid the Samaritan”s-dilemmatype inefficiency.

Lagerlöf”s paper points to a limitation of this case for a welfare state. His argument goes as follows:

When economists have modelled the Samaritan”s-dilemma-type logic, they have assumed that the altruist and the recipient do not face any uncertainty about each other”s preferences. This is typically an unrealistic assumption.

Moreover, the presence of the uncertainty will systematically change the recipient’s behaviour. In particular, Lagerlöf argues, if the recipient when making his saving decision has information about to what extent he will be in need of help, and if the altruist does not have access to this information, then the recipient will have an incentive to save more than otherwise.

For by saving a relatively large amount (thereby behaving as if he expected to be in great need of the savings), the recipient can signal to the altruist that he is indeed in great need, and thus obtain a relatively large transfer.

Does uncertainty undermine the justification for a welfare state?

Hence, uncertainty tends to alleviate the ”undersaving” problem in the Samaritan”s dilemma. It also undermines the argument in favour of a welfare state that was based on the Samaritan”s-dilemma-type logic.

As Lagerlöf discusses, whether uncertainty actually alleviates the problem or works in the opposite direction depends on exactly what the uncertainty concerns. (Indeed, if the uncertainty concerns some particular characteristics of the recipient, the undersaving problem will be worse than under complete information!)

The general conclusion, then, may be that the presence of uncertainty drastically alters the logic of the Samaritan”s dilemma and, under a broad set of circumstances, the undersaving problem that has been used to justify a welfare state is mitigated, which calls this justification into question. A natural next step in order to gain further insight into the relevance of Lagerlöf”s counter argument would be to carry out careful empirical work.

”Efficiency-enhancing Signalling in the Samaritan”s Dilemma” by Johan Lagerlöf is published in the January 2004 issue of the Economic Journal. Johan Lagerlöf is currently a Research Fellow at the WZB Berlin (Social Science Research Centre Berlin); from the autumn 2004, he will be a Senior Lecturer at the Economics Department of Royal Holloway, University of London (website: www.JohanLagerlof.org).

Johan Lagerlöf

+49-30-25491 421 | lagerloef@wz-berlin.de