DP3014 A Theory of Reciprocity

Author(s): Armin Falk, Urs Fischbacher
Publication Date: October 2001
Keyword(s): cooperation, fairness, game theory, reciprocity
JEL(s): C70, H41
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=3014

This Paper presents a formal theory of reciprocity. Reciprocity means that people reward kind actions and punish unkind ones. The theory takes into account that people evaluate the kindness of an action not only by its consequences but also by the intention underlying this action. The theory explains the relevant stylized facts of a wide range of experimental games. Among them are the ultimatum game, the gift-exchange game, a reduced best-shot game, the dictator game, the prisoner's dilemma, and public goods games. Furthermore, the theory explains why the same consequences trigger different reciprocal responses in different environments. Finally, the theory explains why in bilateral interactions outcomes tend to be ?fair? whereas in competitive markets even extremely unfair distributions may arise.