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Net-Loss Reciprocation and the Context Dependency of Economic Choices

  • König, Clemens
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    This paper proposes a novel explanation for the context dependency of individual choices in two-player games. Context dependency refers to the well-established phenomenon that a player, when choosing from a given opportunity set created by the other player’s strategy, chooses differently in different situations because of different alternatives to the other player’s strategy. The utility model used to explain this kind of context dependency incorporates a preference for net-loss reciprocation. Net-loss reciprocation means that a player’s willingness to impose a net loss (i.e., loss minus gain) on the other player increases in the net loss that he or she derives from the other player’s strategy. I show that net-loss reciprocation together with the method for calculating net losses developed in this paper explains the context dependencies in individual behaviour that have been documented in a number of experimental studies, whereas existing models of intention-based reciprocity fail to explain all the evidence.

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    File URL: http://epub.ub.uni-muenchen.de/17474/1/Koenig_2013.pdf
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    Paper provided by University of Munich, Department of Economics in its series Discussion Papers in Economics with number 17474.

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    Date of creation: 17 Nov 2013
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    Handle: RePEc:lmu:muenec:17474
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    1. Gary Charness & Matthew Rabin, 2002. "Understanding Social Preferences With Simple Tests," The Quarterly Journal of Economics, MIT Press, vol. 117(3), pages 817-869, August.
    2. Armin Falk & Urs Fischbacher, 2001. "A Theory of Reciprocity," CESifo Working Paper Series 457, CESifo Group Munich.
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    5. James C. Cox & Daniel Friedman & Steven Gjerstad, 2006. "A Tractable Model of Reciprocity and Fairness," Experimental Economics Center Working Paper Series 2006-05, Experimental Economics Center, Andrew Young School of Policy Studies, Georgia State University.
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    7. Cox, James C., 2004. "How to identify trust and reciprocity," Games and Economic Behavior, Elsevier, vol. 46(2), pages 260-281, February.
    8. 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.
    9. Battigalli, Pierpaolo & Dufwenberg, Martin, 2009. "Dynamic psychological games," Journal of Economic Theory, Elsevier, vol. 144(1), pages 1-35, January.
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    11. Matthew Rabin, 2006. "A Model of Reference-Dependent Preferences," The Quarterly Journal of Economics, MIT Press, vol. 121(4), pages 1133-1165, November.
    12. Jonathan Shalev, 1997. "Loss Aversion Equilibrium," Game Theory and Information 9703001, EconWPA, revised 11 Mar 1997.
    13. Brandts, Jordi & Sola, Carles, 2001. "Reference Points and Negative Reciprocity in Simple Sequential Games," Games and Economic Behavior, Elsevier, vol. 36(2), pages 138-157, August.
    14. Maroš Servátka & Radovan Vadovič, 2009. "Unequal outside options in the lost wallet game," Economics Bulletin, AccessEcon, vol. 29(4), pages 2870-2883.
    15. Ernst Fehr & Simon Gaechter, 1999. "Cooperation and Punishment in Public Goods Experiments," CESifo Working Paper Series 183, CESifo Group Munich.
    16. McKelvey Richard D. & Palfrey Thomas R., 1995. "Quantal Response Equilibria for Normal Form Games," Games and Economic Behavior, Elsevier, vol. 10(1), pages 6-38, July.
    17. McCabe, Kevin A. & Rigdon, Mary L. & Smith, Vernon L., 2003. "Positive reciprocity and intentions in trust games," Journal of Economic Behavior & Organization, Elsevier, vol. 52(2), pages 267-275, October.
    18. DHAENE, Geert & BOUCKAERT, Jan, 2007. "Sequential reciprocity in two-player, two-stage games: An experimental analysis," Working Papers 2007026, University of Antwerp, Faculty of Applied Economics.
    19. Dufwenberg, Martin & Gneezy, Uri, 2000. "Measuring Beliefs in an Experimental Lost Wallet Game," Games and Economic Behavior, Elsevier, vol. 30(2), pages 163-182, February.
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