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Rotten Kids With Bad Intentions

  • Nick Netzer

    ()

    (Department of Economics, University of Zurich)

  • Armin Schmutzler

    ()

    (Department of Economics, University of Zurich)

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 intentionbased 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 rather than positive emotions. In a large class of two-stage games that includes principal-agent and gift-giving games, this prevents the 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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File URL: http://www.soi.uzh.ch/research/wp/2009/wp0919.pdf
File Function: Revised version, 2011
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Paper provided by Socioeconomic Institute - University of Zurich in its series SOI - Working Papers with number 0919.

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Length: 40 pages
Date of creation: Dec 2009
Date of revision: Nov 2011
Handle: RePEc:soz:wpaper:0919
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  1. Gary S. Becker, 1974. "A Theory of Social Interactions," NBER Working Papers 0042, National Bureau of Economic Research, Inc.
  2. Fehr, Ernst & Schmidt, Klaus M., . "A theory of fairness, competition, and cooperation," Chapters in Economics, University of Munich, Department of Economics.
  3. 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.
  4. Armin Falk & Urs Fischbacher, 2001. "A Theory of Reciprocity," CESifo Working Paper Series 457, CESifo Group Munich.
  5. Björn Bartling & Urs Fischbacher, 2008. "Shifting the Blame: On Delegation and Responsibility," IEW - Working Papers 380, Institute for Empirical Research in Economics - University of Zurich.
  6. 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.
  7. M. Rabin, 2001. "Incorporating Fairness into Game Theory and Economics," Levine's Working Paper Archive 511, David K. Levine.
  8. Georg Kirchsteiger & Martin Dufwenberg, 2000. "Reciprocity and wage undercutting," ULB Institutional Repository 2013/5905, ULB -- Universite Libre de Bruxelles.
  9. 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.
  10. Pierpaolo Battigalli & Martin Dufwenberg, 2005. "Dynamic Psychological Games," Levine's Bibliography 784828000000000046, UCLA Department of Economics.
  11. Ernst Fehr & Simon Gachter & Georg Kirchsteiger, 1997. "Reciprocity as a Contract Enforcement Device: Experimental Evidence," Econometrica, Econometric Society, vol. 65(4), pages 833-860, July.
  12. Englmaier, Florian & Leider, Stephen, 2012. "Contractual and organizational structure with reciprocal agents," Munich Reprints in Economics 22010, University of Munich, Department of Economics.
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