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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 some people care about equity the puzzles can be resolved. It turns out that the economic environment determines whether the fair types or the selfish types dominate equilibrium behavior.

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Paper provided by University of Munich, Department of Economics in its series Munich Reprints in Economics with number 20650.

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Date of creation: 1999
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Publication status: Published in Quarterly Journal of Economics 3 114(1999): pp. 817-868
Handle: RePEc:lmu:muenar:20650
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