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Rotten Kids with Bad Intentions

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  • Netzer, Nick
  • Schmutzler, Armin

Abstract

We examine a "Rotten Kid" model (Becker 1974) where a player with social preferences interacts with an egoistic player. We assume that social preferences are intention-based rather than outcome-based. In a very general multi-stage setting we show that any equilibrium must involve mutually unkind behavior of both players, endogenously generating negative emotions rather than positive altruism. In a large class of two-stage games that includes principal-agent and gift-giving games, this prevents equilibrium from being materially Pareto efficient. Compared to the subgame-perfect equilibrium without social preferences, efficiency is still generally increased. On the other hand, the materialistic player has lower whereas the reciprocal player has higher material payoffs, so that reciprocity does not increase equity: For sufficiently strong reciprocity concerns, the materialistic player ends up with a negligible share of the gains from trade.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7667.

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Date of creation: Jan 2010
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Handle: RePEc:cpr:ceprdp:7667

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Related research

Keywords: Gift Giving; Moral Hazard; Psychological Games; Reciprocity;

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References

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  1. Charness, Gary & Rabin, Matthew, 2001. "Understanding Social Preferences with Simple Tests," Department of Economics, Working Paper Series qt4qz9k8vg, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  2. Armin Falk & Urs Fischbacher, 2001. "A Theory of Reciprocity," CESifo Working Paper Series 457, CESifo Group Munich.
  3. Ernst Fehr & Klaus M. Schmidt, 1999. "A Theory Of Fairness, Competition, And Cooperation," The Quarterly Journal of Economics, MIT Press, vol. 114(3), pages 817-868, August.
  4. M. Rabin, 2001. "Incorporating Fairness into Game Theory and Economics," Levine's Working Paper Archive 511, David K. Levine.
  5. Georg Kirchsteiger & Ernst Fehr & Simon Gächter, 1997. "Reciprocity as a contract enforcement device: experimental evidence," ULB Institutional Repository 2013/5911, ULB -- Universite Libre de Bruxelles.
  6. Dufwenberg, Martin & Kirchsteiger, Georg, 2000. "Reciprocity and wage undercutting," European Economic Review, Elsevier, vol. 44(4-6), pages 1069-1078, May.
  7. Axel Ockenfels & Gary E. Bolton, 2000. "ERC: A Theory of Equity, Reciprocity, and Competition," American Economic Review, American Economic Association, vol. 90(1), pages 166-193, March.
  8. Gary S. Becker, 1974. "A Theory of Social Interactions," NBER Working Papers 0042, National Bureau of Economic Research, Inc.
  9. Pierpaolo Battigalli & Martin Dufwenberg, 2005. "Dynamic Psychological Games," Levine's Bibliography 784828000000000046, UCLA Department of Economics.
  10. Florian Englmaier & Stephen Leider, 2012. "Contractual and Organizational Structure with Reciprocal Agents," American Economic Journal: Microeconomics, American Economic Association, vol. 4(2), pages 146-83, May.
  11. Amihai Glazer, 2008. "Optimal Contracts When a Worker Envies His Boss," Journal of Law, Economics and Organization, Oxford University Press, vol. 24(1), pages 120-137, May.
  12. Björn Bartling & Urs Fischbacher, 2008. "Shifting the Blame: On Delegation and Responsibility," IEW - Working Papers 380, Institute for Empirical Research in Economics - University of Zurich.
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Citations

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Cited by:
  1. De Marco, Giuseppe & Immordino, Giovanni, 2013. "Partnership, reciprocity and team design," Research in Economics, Elsevier, vol. 67(1), pages 39-58.
  2. Andreas Polk & Armin Schmutzler & Adrian Muller, 2010. "Lobbying and the Power of Multinational Firms," SOI - Working Papers 1008, Socioeconomic Institute - University of Zurich.
  3. Matteo Bassi & Marco Pagnozzi & Salvatore Piccolo, 2013. "Optimal Contracting with Altruism and Reciprocity," CSEF Working Papers 342, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  4. Giuseppe De Marco & Giovanni Immordino, 2012. "Reciprocity in the Principal Multiple Agent Model," CSEF Working Papers 314, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  5. Michele Sennhauser, 2009. "Why the Linear Utility Function is a Risky Choice in Discrete-Choice Experiments," SOI - Working Papers 1014, Socioeconomic Institute - University of Zurich.
  6. Felix Bierbrauer & Nick Netzer, 2012. "Mechanism design and intentions," ECON - Working Papers 066, Department of Economics - University of Zurich, revised Apr 2014.

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