There is strong evidence that people exploit their bargaining power in competitivemarkets butnot inbilateral bargainingsituations. Thereisalsostrong 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 selesh types dominate equilibrium behavior.

/pdf/a-theory-of-fairness-competition-and-cooperation-20ykvpovfq.pdf

A theory of fairness, competition and cooperation

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 a fraction of the people exhibits inequality aversion the puzzles can be resolved.

/pdf/a-theory-of-fairness-competition-and-cooperation-445axsa22c.pdf

A Theory of Fairness, Competition and Cooperation

People like to help those who are helping them and to hurt those who are hurting them. Outcomes rejecting such motivations are called fairness equilibria. Outcomes are mutual-max when each person maximizes the other's material payoffs, and mutual-min when each person minimizes the other's payoffs. It is shown that every mutual-max or mutual-min Nash equilibrium is a fairness equilibrium. If payoffs are small, fairness equilibria are roughly the set of mutual-max and mutual-min outcomes; if payoffs are large, fairness equilibria are roughly the set of Nash equilibria. Several economic examples are considered and possible welfare implications of fairness are explored. Copyright 1993 by American Economic Association.

https://www.jstor.org/stable/pdfplus/2117561.pdf

Incorporating Fairness into Game Theory and Economics

Virtually all current theories of choice under risk or uncertainty are cognitive and consequentialist. They assume that people assess the desirability and likelihood of possible outcomes of choice alternatives and integrate this information through some type of expectation-based calculus to arrive at decision. The authors propose an alternative theoretical perspective, the risk-as-feelings hypothesis, that highlights the role of affect experienced at the moment of decision making. Drawing on research from clinical, physiological, and other subfield of psychology, they show that emotional reactions to risky situations often drive behavior. The risk-as-feelings hypothesis is shown to explain a wide range of phenomena that have resisted interpretation in cognitive-consequentialist terms.

Risk as Feelings

A menu of paired lottery choices is structured so that the crossover point to the high-risk lottery can be used to infer the degree of risk aversion With normal laboratory payoffs of several dollars, most subjects are risk averse and few are risk loving Scaling up all payoffs by factors of twenty, fifty, and ninety makes little difference when the high payoffs are hypothetical In contrast, subjects become sharply more risk averse when the high payoffs are actually paid in cash A hybrid "power/expo" utility function with increasing relative and decreasing absolute risk aversion nicely replicates the data patterns over this range of payoffs from several dollars to several hundred dollars

Risk Aversion and Incentive Effects

This paper examines the relationship between variations in group size and "free-riding" behavior in the voluntary provision of public goods. We examine experimentally two pertinent concepts: the marginal return to an individual from contributions to the public good, and the actual number of members in the group. Our results strongly support a hypothesis that increasing group size leads to a reduction in allocative efficiency when accompanied by a decrease in marginal return from the public good (as from crowding or an association of large groups with imperceptibility of marginal benefits). Our results do not support a pure numbers-in-the-group effect.

Group Size Effects in Public Goods Provision: The Voluntary Contributions Mechanism

http://www.dklevine.com/archive/refs411.pdf

Group size and the voluntary provision of public goods: Experimental evidence utilizing large groups

We examine experimentally the role of active communication as a mechanism for improving economic efficiency in a voluntary contribution public goods environment. With no communication this environment has been shown to induce significant subop-timality, approaching zero contributions with iteration of the decision environment. Communication is shown to improve group optimality significantly. We examine the robustness of our results in increasingly complex environments and in environments in which there has been a history of communication but active communication is no longer available.

/pdf/communication-and-free-riding-behavior-the-voluntary-3pl25qtknx.pdf

COMMUNICATION and FREE‐RIDING BEHAVIOR: THE VOLUNTARY CONTRIBUTION MECHANISM

The most important single observation from this research is the similarity between our wide range of results and the multitude of seemingly divergent conclusions about free riding from previous experimental results. Even when defined in the restrictive manner of this paper, free riding is neither absolutely all pervasive nor always nonexistent. This ‘intermediate’ result is not the same as a general theory which states that the predictable result of public goods provision processes is always weak free riding. The extremes of strong free riding and near-Lindahl optimal behavior can and do occur.

R. Mark Isaac

Papers

Group Size Effects in Public Goods Provision: The Voluntary Contributions Mechanism

Group size and the voluntary provision of public goods: Experimental evidence utilizing large groups

COMMUNICATION and FREE‐RIDING BEHAVIOR: THE VOLUNTARY CONTRIBUTION MECHANISM

Divergent evidence on free riding: An experimental examination of possible explanations

Public Goods Provision in an Experimental Environment