A Theory of Fairness, Competition, and Cooperation

Abstract

There is strong evidence that people exploit their bargaining power in competitive markets but not in bilateral bargaining situations. There is also strong evidence that people exploit free-riding opportunities in voluntary cooperation games. Yet, when they are given the opportunity to punish free riders, stable cooperation is maintained, although punishment is costly for those who punish. This paper asks whether there is a simple common principle that can explain this puzzling evidence. We show that if some people care about equity the puzzles can be resolved. It turns out that the economic environment determines whether the fair types or the selfish types dominate equilibrium behavior

Role‐dependent Social Preferences

“…In a regression analysis they find the influence of outside options on bargaining results to be weaker than expected and the average share of the pie of the advantaged group to be smaller than the expected 0.6. They explain these results by a variant of the Fehr and Schmidt (1999) inequity aversion utility function…”

“…The assumption that incomplete matches are unstable requires values s j to be larger than À1. Fehr and Schmidt (1999) inequity aversion is specified in Appendix B. The altruistic core is depicted in Figure 1, where the effect of decreasing r W 1 is illustrated.…”

“…Laury and Taylor (2008) report that context-free parametric measures of altruism only poorly predict which subjects will contribute to 'a naturally occurring public good'. Blanco et al (2011) estimate the individual parameters of the Fehr and Schmidt (1999) inequity aversion model in dictator and ultimatum game experiments, and use the estimated parameters, in a within-subjects approach, in order to predict individual behaviour in sequential prisoner's dilemma and public good games. They conclude that the degree of individual inequity aversion in the first games has very little explanatory power for subsequent games.…”

Workplace Productivity and Bonus Preferences: Why Do Men With Low Productivity Prefer Individual Pay?

“…Workers who are inequity-averse have utility functions that increase in their own income, but decrease in the level of income inequality, as in Fehr and Schmidt (1999). If inequity aversion is an important concern, then we should expect a leaning towards team pay (compared to the principal-agent model).…”

Effect of fairness preference on dual-channel supply chain

“…However, in recent years, some researchers have found that the majority of the decision-makers has equity preference characteristics, they care not only their monetary payoffs but also fair treatment in the real life (Kahneman 1986 [13] ; Fehr 1999 [14] ; Frazier 1983 [15] ).…”