‘ Two ’ s Company , Three ’ s a Group ’

In this study, we use an allocation experiment to study the effects of group identity and group size on in-group favouritism when the person’s own payoff is not affected by her decision. In a triadic setting when subjects are asked to allocate a fixed amount of resource between two other anonymous individuals, the majority of the subjects choose to allocate equal amounts to both the in-group and the out-group members. Telling the subjects that they belong to the same ‘group’ does not increase the amount allocated to the in-group member relative to the out-group member in a triadic setting. However, once the sizes of the in-group and the out-group are increased from one recipient to three (which we refer to as ‘the favour game’ ), we observe a sharp increase in in-group favouritism. Our results suggest that no special treatment is needed in a one-shot experiment to induce the distinction between the in-group and the out-group when groups consist of more than two group members. JEL classification: D73, C92