Working Paper: CEPR ID: DP1812
Authors: Ernst Fehr; Klaus M. Schmidt
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 a fraction of the people exhibits inequality aversion the puzzles can be resolved.
Keywords: experimental economics; utility theory; bargaining; public goods; reciprocity
JEL Codes: C78; C90; D43; H41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| inequality aversion (D63) | fair outcomes in bargaining situations (C78) |
| inequality aversion (D63) | fair offers among selfish actors (C72) |
| distribution of types (C46) | outcome in monopolistic market games (D43) |
| inequality aversion (D63) | cooperation in public goods games without punishment (C72) |
| selfish players (C72) | complete defection in public goods games without punishment (H40) |
| introduction of punishment (K40) | cooperation among all players (C71) |
| inequality aversion (D63) | enforcement of cooperation among players when punishment is introduced (C72) |