DP1812 A Theory of Fairness, Competition and Cooperation

Author(s): Ernst Fehr, Klaus M. Schmidt
Publication Date: March 1998
Keyword(s): Bargaining, experimental economics, Public Goods, Reciprocity, utility theory
JEL(s): C78, C90, D43, H41
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1812

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.