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Rotten Kids with Bad Intentions

  • Netzer, Nick
  • Schmutzler, Armin

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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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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  1. 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.
  2. Becker, Gary S, 1974. "A Theory of Social Interactions," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1063-93, Nov.-Dec..
  3. M. Rabin, 2001. "Incorporating Fairness into Game Theory and Economics," Levine's Working Paper Archive 511, David K. Levine.
  4. Gary Charness & Matthew Rabin, 2003. "Understanding Social Preferences with Simple Tests," General Economics and Teaching 0303002, EconWPA.
  5. 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.
  6. Armin Falk & Urs Fischbacher, 2001. "A Theory of Reciprocity," CESifo Working Paper Series 457, CESifo Group Munich.
  7. Björn Bartling & Urs Fischbacher, 2008. "Shifting the Blame: On Delegation and Responsibility," TWI Research Paper Series 32, Thurgauer Wirtschaftsinstitut, Universität Konstanz.
  8. Fehr, Ernst & Schmidt, Klaus M., . "A theory of fairness, competition, and cooperation," Chapters in Economics, University of Munich, Department of Economics.
  9. Dufwenberg, Martin & Kirchsteiger, Georg, 2000. "Reciprocity and wage undercutting," European Economic Review, Elsevier, vol. 44(4-6), pages 1069-1078, May.
  10. Englmaier, Florian & Leider, Stephen, 2012. "Contractual and organizational structure with reciprocal agents," Munich Reprints in Economics 22010, University of Munich, Department of Economics.
  11. 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.
  12. Battigalli, Pierpaolo & Dufwenberg, Martin, 2009. "Dynamic psychological games," Journal of Economic Theory, Elsevier, vol. 144(1), pages 1-35, January.
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