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A Theory of Fairness, Competition and Cooperation

  • Fehr, Ernst
  • Schmidt, Klaus M.

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.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1812.

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Date of creation: Mar 1998
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Handle: RePEc:cpr:ceprdp:1812
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  18. Agell, J. & Lundborg, P., 1992. "Theories of Pay and Unemployment: Survey Evidence from Swedish Manufacturing Firms," Papers 1993-8, Uppsala - Working Paper Series.
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  20. Tversky, Amos & Kahneman, Daniel, 1991. "Loss Aversion in Riskless Choice: A Reference-Dependent Model," The Quarterly Journal of Economics, MIT Press, vol. 106(4), pages 1039-61, November.
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  23. Hoffman, Elizabeth & McCabe, Kevin A & Smith, Vernon L, 1996. "On Expectations and the Monetary Stakes in Ultimatum Games," International Journal of Game Theory, Springer, vol. 25(3), pages 289-301.
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