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Modeling Social Preferences: A Generalized Model of Inequity Aversion

  • Hayat Khan

Taking note of the wide variety and growing list of models in the literature to explain patterns of behavior observed in laboratory experiments, this paper identifies two tests, the Variety Test (ability of a model to explain outcomes under variety or alternative scenarios) and the Psychological Test (ability of a model to conform to psychological intuition), that can be used to judge any model of other-regarding behavior. It is argued that for a mathematical model to qualify as a social welfare function, it must simultaneously pass the two tests. It is shown that none of the models proposed to date passes these two tests simultaneously. The paper proposes a generalized model of inequity aversion which parsimoniously explains interior solution in the dictator game and dynamics of outcomes in other games. The paper postulates that one’s idea of equitable distribution is state-dependent, where the state is determined by psychological and structural parameters. The state could be fair, superior or inferior. Individuals in a fair state have zero equity-bias and split the pie evenly. Those in a superior (inferior) state have positive (negative) equity-bias and value more (less) than fair distribution as equitable distribution. Given psychological tendencies of an individual, every experimental design/structure assigns one of the three states to players which lead to individual-specific valuation of equity. Prediction about outcomes across different experiments and designs can be made through predicting their impact on equity-bias. All aspects of an individual’s behavior, such as altruism, fairness, reciprocity, self-serving bias, kindness, intentions etc, manifest themselves in the equity-bias. The model therefore is all-encompassing.

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File URL: http://www.eeri.eu/documents/wp/EERI_RP_2009_21.pdf
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Paper provided by Economics and Econometrics Research Institute (EERI), Brussels in its series EERI Research Paper Series with number EERI_RP_2009_21.

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Length: 45 pages
Date of creation: 09 2009
Date of revision:
Handle: RePEc:eei:rpaper:eeri_rp_2009_21
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  1. Cox, J. & Friedman, D. & Gjerstad, S., 2006. "A Trackable Model of Reciprocity and Fairness," Purdue University Economics Working Papers 1181, Purdue University, Department of Economics.
  2. Colin F. Camerer & Richard H. Thaler, 1995. "Anomalies: Ultimatums, Dictators and Manners," Journal of Economic Perspectives, American Economic Association, vol. 9(2), pages 209-219, Spring.
  3. Gary Charness & Matthew Rabin, 2003. "Understanding Social Preferences with Simple Tests," General Economics and Teaching 0303002, EconWPA.
  4. Georg Kirchsteiger & Martin Dufwenberg, 2004. "A theory of sequential reciprocity," ULB Institutional Repository 2013/5899, ULB -- Universite Libre de Bruxelles.
  5. Armin Falk & Urs Fischbacher, 2001. "A Theory of Reciprocity," CESifo Working Paper Series 457, CESifo Group Munich.
  6. Ottone, Stefania & Ponzano, Ferruccio, 2005. "An Extension to the Model of Inequity Aversion by Fehr and Schmidt," POLIS Working Papers 51, Institute of Public Policy and Public Choice - POLIS.
  7. Nicholas Bardsley, 2005. "Altruism or Artefact? A Note on Dictator Game Giving," Discussion Papers 2005-10, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham.
  8. Hoffman Elizabeth & McCabe Kevin & Shachat Keith & Smith Vernon, 1994. "Preferences, Property Rights, and Anonymity in Bargaining Games," Games and Economic Behavior, Elsevier, vol. 7(3), pages 346-380, November.
  9. Rabin, Matthew, 1993. "Incorporating Fairness into Game Theory and Economics," American Economic Review, American Economic Association, vol. 83(5), pages 1281-1302, December.
  10. Schotter, Andrew & Weiss, Avi & Zapater, Inigo, 1996. "Fairness and survival in ultimatum and dictatorship games," Journal of Economic Behavior & Organization, Elsevier, vol. 31(1), pages 37-56, October.
  11. Gary E Bolton & Rami Zuwick, 2010. "Anonymity versus punishments in ultimatum bargaining," Levine's Working Paper Archive 826, David K. Levine.
  12. Hoffman, Elizabeth & McCabe, Kevin & Smith, Vernon L, 1996. "Social Distance and Other-Regarding Behavior in Dictator Games," American Economic Review, American Economic Association, vol. 86(3), pages 653-60, June.
  13. Bereby-Meyer, Yoella & Niederle, Muriel, 2005. "Fairness in bargaining," Journal of Economic Behavior & Organization, Elsevier, vol. 56(2), pages 173-186, February.
  14. Fehr, Ernst & Schmidt, Klaus M., . "A theory of fairness, competition, and cooperation," Chapters in Economics, University of Munich, Department of Economics.
  15. 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.
  16. John Kagel & Katherine Wolfe, 2001. "Tests of Fairness Models Based on Equity Considerations in a Three-Person Ultimatum Game," Experimental Economics, Springer, vol. 4(3), pages 203-219, December.
  17. Theo Offerman, 1999. "Hurting hurts more than Helping helps: The Role of the Self-serving Bias," Tinbergen Institute Discussion Papers 99-018/1, Tinbergen Institute.
  18. Erlei, Mathias, 2008. "Heterogeneous social preferences," Journal of Economic Behavior & Organization, Elsevier, vol. 65(3-4), pages 436-457, March.
  19. Offerman, Theo, 2002. "Hurting hurts more than helping helps," European Economic Review, Elsevier, vol. 46(8), pages 1423-1437, September.
  20. repec:dgr:kubcen:199837 is not listed on IDEAS
  21. Kagel, John H. & Kim, Chung & Moser, Donald, 1996. "Fairness in Ultimatum Games with Asymmetric Information and Asymmetric Payoffs," Games and Economic Behavior, Elsevier, vol. 13(1), pages 100-110, March.
  22. Gary E. Bolton & Rami Zwick & Elena Katok, 1998. "Dictator game giving: Rules of fairness versus acts of kindness," International Journal of Game Theory, Springer, vol. 27(2), pages 269-299.
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