Stakeholder Fairness Under an Induced ‘Veil of Ignorance': Findings From a Laboratory Experiment

Stakeholder Fairness Under an Induced ‘Veil of Ignorance': Findings From a Laboratory Experiment

Sumit Sarkar (XLRI, Jamshedpur, India) and Soumyakanti Chakraborty (Indian Institute of Management, Calcutta, India)
Copyright: © 2019 |Pages: 17
DOI: 10.4018/IJSDS.2019010105
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John Rawls introduced the ‘veil of ignorance' in social contract theory to bring about a common conception of justice, and hypothesized that it will enable rational individuals to choose distributive shares on basis of ‘maximin' principle. R. E. Freeman conceptualised stakeholder fairness using the Rawlsian ‘veil of ignorance'. In contrast to Rawls' theory, John Harsanyi postulated that rational individuals behind the ‘veil of ignorance' will choose allocation to maximise expected utility. This article investigates how subjects choose allocations behind the ‘veil of ignorance,' in a laboratory experiment, and interprets the findings in light of stakeholder fairness. The ‘veil of ignorance' was induced on randomly paired and mutually anonymous subjects, who were asked to choose allocations in a simultaneous move discrete choice Nash demand game. Both ‘maximin' principle and expected utility maximisation was found to be used by the subjects. Choice of allocations where no one is worse off vis-à-vis status quo was salient. This is consistent with Freeman's Principle of Governance.
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1. Introduction

Rawls (1968) conceptualized the idea of the ‘original position’ to foster distributive justice in social contracts. In order to induce the ‘original position’, he constructed the ‘veil of ignorance’ that dissociates members of the society from their social positions, and their respective standpoints in the distribution of natural assets. Evan and Freeman (1988), Freeman and Evan (1990) and Freeman (1994) applied the Rawlsian framework in stakeholder theory and hypothesized that rational stakeholders would be able to arrive at principles that would produce fair contracts, if they could exercise their choices from the ‘original position’. Freeman (1994) set out six “groundrules” for stakeholders making choices behind a ‘veil of ignorance’. Among these “groundrules”, the Principle of Governance is particularly interesting to us. The Principle of Governance requires unanimity on the procedure for changing the rules of the game. This principle is founded on the same Kantian idea on which Rawls’s framework of social contract theory was built. Freeman (1994) propositioned that this requirement of unanimity along with participation of each stakeholder in the governance of the corporation will ensure that none of the stakeholders are worse-off because of a redistribution.

In this paper we experimentally study how individuals choose allocations behind a ‘veil of ignorance’ and explore implications of our findings for stakeholder fairness. The most important finding of our study is that the subjects ensured that no one is worse-off because of their choice. This salient experimental finding is consistent with Freeman’s postulate that if each stakeholder participates in the governance of the corporation and are ignorant about their actual roles, the requirement of unanimity will ensure that none of the stakeholder’s interest is compromised. The paper is structured as follows: In section 2 we present a snapshot of Freeman’s Principle of Governance, and construct an example to show the relevance and practical applicability of the ‘veil of ignorance’ in stakeholder fairness. Then we discuss Freeman’s idea of stakeholder fairness and present our research question. We present our research instrument, the Discrete Choice Nash Demand Game, and state our hypothesis in section 3. Sections 4 and 5 describe the experiment and present the results. Based on our findings, we revisit the discussion on stakeholder fairness in section 6.


2. Stakeholder Fairness – Freeman’S Principle Of Governance And The ‘Veil Of Ignorance’

Rawls (1968, 1999) postulates that rational individuals, while making choices behind the ‘veil of ignorance’, will apply the ‘Difference Principle’ that ensures the largest possible gain for the individual who gains the least vis-à-vis the status quo. This is why the ‘Difference Principle’ is also known as ‘maximin’ principle. Freeman and Evan (1990, p. 353) interprets the ‘veil of ignorance’ as “that no one knows which particular stake he or she holds in the corporation.” For the representative stakeholders in Freeman (1994), who are trying to decide on the rules of the game, ignorance of their actual roles helps them to avoid compromising the interest of any stakeholder in the corporation. Freeman and Evan (1990) and Freeman (1994) advocated voting membership in the board of directors for all stakeholders, in order to implement fair contracting.

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