Tarala

Discussion Paper No. 66

The Economics of Fairness, Reciprocity and Altruism – Experimental Evidence and New Theories
Ernst Fehr* Klaus M. Schmidt**

June 2005

*Ernst Fehr, Institute for Empirical Research in Economics, University of Zurich, Bluemlisalpstrasse 10, CH-8006 Zurich, Switzerland, email: efehr@iew.unizh.ch **Klaus M. Schmidt, Department of Economics, University of Munich,Ludwigstrasse 28, D-80539 Muenchen, Germany, email: klaus.schmidt@Lrz.uni-muenchen.de

Financial support from the Deutsche Forschungsgemeinschaft through SFB/TR 15 is gratefully acknowledged.

Sonderforschungsbereich/Transregio 15 · www.gesy.uni-mannheim.de Universität Mannheim · Freie Universität Berlin · Humboldt-Universität zu Berlin · Ludwig-Maximilians-Universität München RheinischeFriedrich-Wilhelms-Universität Bonn · Zentrum für Europäische Wirtschaftsforschung Mannheim Speaker: Prof. Konrad Stahl, Ph.D. · Department of Economics · University of Mannheim · D-68131 Mannheim, Phone: +49(0621)1812786 · Fax: +49(0621)1812785

The Economics of Fairness, Reciprocity and Altruism – Experimental Evidence and New Theories
Ernst Fehra)
University of Zurich

Klaus M. Schmidtb)University of Munich and CEPR

Chapter written for the Handbook of Reciprocity, Gift-Giving and Altruism
This version: June 6, 2005

JEL classification numbers: C7, C9, D0, J3. Keywords: Behavioural Economics, Other-regarding Preferences, Fairness, Reciprocity, Altruism, Experiments, Incentives, Contracts, Competition.

Ernst Fehr, Institute for Empirical Research in Economics, University ofZurich, Bluemlisalpstrasse 10, CH-8006 Zurich, Switzerland, email: efehr@iew.unizh.ch. b) Klaus M. Schmidt, Department of Economics, University of Munich, Ludwigstrasse 28, D-80539 Muenchen, Germany, email: klaus.schmidt@Lrz.uni-muenchen.de.

a)

Contents
1 2 Introduction and Overview Empirical Foundations of Other-regarding Preferences 2.1 Other-regarding Behaviour in Simple Games 2.2Other-regarding Preferences versus Irrational Behaviour 2.3 Neuroeconomic Foundations of Other-regarding Preferences Theories of Other-Regarding Preferences 3.1 Social Preferences 3.1.1 Altruism 3.1.2 Relative Income and Envy 3.1.3 Inequity Aversion 3.1.4 Hybrid Models 3.2 Interdependent Preferences 3.2.1 Altruism and Spitefulness 3.3 Models of Intention based Reciprocity 3.2.1 Fairness Equilibrium 3.2.2Intentions in Sequential Games 3.2.3 Merging Intentions and Social Preferences 3.2.4 Guilt Aversion and Promises 3.4 Axiomatic Approaches Discriminating between Theories of Other-regarding Preferences 4.1 Who are the Relevant Reference Actors? 4.2 Equality versus Efficiency 4.3 Revenge versus Inequity Reduction 4.4 Does Kindness Trigger Rewards? 4.5 Maximin Preferences 4.6 Preferences for Honesty4.7 Summary and Outlook Economic Consequences 5.1 Cooperation and Collective Action 5.2 Endogenous Formation of Cooperative Institutions 5.3 How Fairness, Reciprocity and Competition Interact 5.4 Fairness and Reciprocity as a Source of Economic Incentives Conclusions

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Introduction and Overview

Many influential economists, including Adam Smith (1759), Gary Becker(1974), Kenneth Arrow (1981), Paul Samuelson (1993) and Amartya Sen (1995), pointed out that people often do care for the well-being of others and that this may have important economic consequences. However, most economists still routinely assume that material self-interest is the sole motivation of all people. This practice contrasts sharply with a large body of evidence gathered by experimentaleconomists and psychologists during the last two decades. This evidence indicates that a substantial percentage of the people are strongly motivated by other-regarding preferences and that concerns for the well-being of others, for fairness and for reciprocity, cannot be ignored in social interactions. One purpose of this chapter is to review this evidence, suggest how it can be best interpreted, and...