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Fairness and self-interest: An assessment
Fairness and Self-Interest: An Assessment
ESKANDERALVI* Western Michigan University This paper provides an assessment of some fairness notions that are particularly relevant to economics of the marketplace. Motivations of fairness are also discussed. In this vein, three sources of fairness are outlined: moral precepts, stable convention, and reciprocity. Some suitable theoretical and empirical evidence are presented in support of these views. Economic models based on the view that man is purely selfish have performed poorly in some areas, particularly game theory and voluntary contributions to public goods. In other social sciences, notably in psychology, political science, and sociobiology researchers have also encountered systematic deviations from purely selfish behavior. There is ample evidence that both fairness and self-interest matter, It is hoped that this paper will provide a better comprehension of the tensions and complementarities between fairness and self-interest and improve our understanding of human behavior.
ABSTRACT-
INTRODUCTION The purpose of this paper is to present different notions of fairness that prevail in the economics literature, discuss their relationship to self-interest, and suggest their motivations. The tensions and complementarities between fairness and selfinterest may represent fertile grounds for understanding the foundations of economic behavior. Self-interest clearly needs little in the way of introduction; it has been firmly entrenched in Economics, and to a lesser extent in Psychology, Sociology, and Political Theory. Yet it has become increasingly transparent that fair behavior is valued in societies and can be found even in unexpected situations. It *Direct all correspondence to: Eskander Alvi, Department of Economics, Western Michigan University, Kalamazoo, MI 49008; e-mail: [email protected]. Journal of Socio-Economics, Volume 27, No. 2, pp. 245-261 Copyright © 1998 by JAI Press, Inc. All rights of reproduction in any form reserved. ISSN: 1053-5357
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may be noted that the emphasis is on basic notions of fairness that prevail without the existence of any enforcement mechanisms and may be observed even in onetime transactions. Where enforcement arrangements are present, fairness is easier to explain and is often consistent with long term self-interested behavior. The standard practice in the social sciences, particularly in economics, is to view selfishness as the dominant motive for human action. While the predictions of economic models based on selfishness have done very well in some areas, they have also failed in other areas. The systematic deviations from the predictions of economic theory observed in experiments are most noteworthy in areas of game theory and social dilemma situations. Economists and other social scientists have made some attempts at understanding the basic foundations of human behavior. These attempts have taken two broad routes: conceptual and empirical. Conceptual ones appear in a variety of fields; socio- economics, evolutionary biology, game theory, ethics, political theory, all try to understand the basic foundations of human behavior conceptually. Some interesting attempts have also been made in the evolutionary biology literature. Basically, the idea is that social interaction and behavior are not unique to man. Therefore, general principles governing the behavior of animal species may provide valuable insights about the causes and motivations of our own behavior. Some noteworthy attempts in this area were made by sociobiologists--Hamilton (1964), Trivers (1971) and Wilson (1978). Jack Hirshleifer (1977, 1978a, 1978b, 1987) has made several remarkable attempts in examining the links between economics and biology. Robert Frank (1987), following the sociobiologists' approach, concludes that in some situations "gains from cooperation cannot be fully exploited...unless one adopts at the outset what everyone would call a genuinely unselfish point of view" (p. 602). This also reflects Amartya Sen's (1977) view that people who are selfishly rational are "rational fools. ''l The general theme in this paper is that there are three broad sources of fair behavior: moral precept, convention, and reciprocity. The first idea has a long tradition in economics and the social sciences and states that fairness is driven by moral prerogatives. Such a conception of fairness is evident in Adam Smith's Theory of Moral Sentiments (1759) and is also central to the socio-economics view. Socio-economists discuss fairness as a moral prerequisite that cannot be derived from other principles. Etzioni (1988) argues that there are at least two irreducible sources of utility, referring to self-interest and morality. Also, Wilson (1993) suggests that moral foundations of behavior are very relevant. Basically, the premise is that moral underpinning must be satisfied for the pursuit of economic behavior. The second conception is that fairness is a stable convention brought about by an evolutionary process. Three elements are usually required to run the evolutionary model: limited rationality, interactions among members, and random change. From a causal perspective, this idea is mostly devoid of moral and rational under-
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pinning. Because a stable convention persists for a long time once established, this literature suggests that people usually rationalize the convention in terms of morality and fairness. Origins of this idea can be traced to Hayek (1960, 1979) and has been popularized by Ullman-Margalit (1977), Sugden (1986, 1993), and Young (1993a, 1996). Finally, fairness can also be the result of reciprocity: people help those who are helpful and hurt those who are hurtful to them. This conception of fairness is closer to the model of self-interested behavior and implies that people sacrifice personal gains to help or hurt others. Though this is somewhat similar in spirit to the idea that fairness is induced via an enforcement mechanism, this conception of fairness can also have behavioral implications in one-shot games. Rabin (1993) constructs such a model of fairness where psychological beliefs are capable of coordinating actions. If I believe that my waiter cares for me while dining, and the waiter believes that I am sensitive to his needs, then it may be possible to have good service complimented by a regular gratuity. In this way, beliefs may help overcome the unkind equilibrium involving zero caring and sensitivity. The empirical literature, particularly in the areas of game theory and voluntary contributions to public goods, has directly and indirectly put to test the basic assumption of selfishness. In a variety of economic and social situations, the behavior of experimental subjects has been observed to systematically deviate from the predictions of the relevant theory. Several of these experiments are documented in Alvin Roth (1988), Richard Thaler (1988) and Dawes and Thaler (1987). Surveys reported in Kahneman, Knetsch and Thaler (1986) reveal significant concern for fairness. Also, there is support for the view that fairness is engendered by moral preconditions. Subjects often systematically forgo gains when games do not seem to conform to some basic moral prerequisites. Once the moral dimensions are met, indeed subjects are found to behave more as economic man.2 We suggest the term "competitive-fairness" to describe fairness motivated by moral underpinning and consistent with self-interested behavior in the market environment. As the name suggests, this notion is not divorced from the market and is not contrary to self-interest. We argue that such a conception of fairness complements economic efficiency by providing safeguards and checks against noncompetitive elements. It may be noted that such social predisposition provides pervasive discipline in the marketplace and helps achieve better allocation of resources. In the next section, we begin with some general notions of fairness and then discuss those that are relevant to the market mechanism. Applications relating to social dilemma games, ultimatum and multistage games, and markets are also discussed followed by the view that fairness and fairness as reciprocal behavior as well as its foundations.
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Notions of Fairness Most discussed concept of fairness is that of distributive justice. In this regard a variety of distributive concepts--based on effort, ability, merit, need, common good--have been discussed in the social sciences. Among sociologists and psychologists, the equity theory--reward in proportion to input or effort--is mostly accepted as the basis of distribution that prevails in most societies. This is most prominent in Homans (1961), Blau (1964), and Adams (1965). Contemporary political philosophers, Rawls (1971), Nozick (1974), and Gauthier (1986) defend other principles of distribution. Most concepts of distributive justice, however, go beyond the basic principles of the market. Important exceptions are Nozick (1974) and Gauthier (1986), both defend the entitlement principle in line with the importance of the market. 3 Equity is often thought to be an important ingredient in a market system i.e., it is believed that "reward in proportion to input" occurs in a freely functioning market. While this may be true in some situations, and perhaps generally desirable, it is clearly not automatically implied by the free operation of markets. Working hard or putting in a lot of effort does not automatically mean higher rewards. 4 Also, fairness can be complementary to self-interest. Along this vein, fair behavior is often viewed as important to the maximization of long run profits (Akerlof, 1980, 1982; Okun, 1981). Okun (1981) suggests that when repeat business is important, fair behavior is in the best interest of firms. Akerlof (1980, 1982) argues that firms care for their reputation and invest to create high work morale and customer goodwill. A key element in this argument is that long-term relation between the transacting parties serves as the enforcement mechanism, rewarding fair and penalizing unfair behavior. 5 In this paper, however, we examine fairness within regular economic institutions that involve mostly one-time transactions. 6 Kahneman, Knetsch, Thaler (1986) find widespread concerns for fairness even when there are no long-term relationships involved.
Conventional Economic Models and Fairness Concerns In this section conventional economic models exhibiting sharp tensions between self-interest and fairness are examined. The purpose is to evaluate if fairness concerns are prevalent and if moral prerequisites matter. The second aspect, however, is more thoroughly discussed in a later section. We next outline the thetry and some suitable evidence relating to dilemma games, ultimatum and multistage games, and some market situations.
DILEMMA GAMES Voluntary contributions to the public good and prisoner's dilemma are perhaps the most analyzed dilemma games. The essential feature of these games is that the payoffs to a participant depend mostly on the actions of others, such that individu-
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ally rational actions almost never lead to socially efficient outcomes. These dilemma games provide an excellent opportunity to study both selfish behavior and concerns for fairness. If fairness is relevant the outcome should be different from the theoretical predictions and may better explain the data. W e deliberately chose a simple dilemma game that has been experimentally tested. 7 Consider a one shot game between n players, each with initial e n d o w m e n t e. The rules o f the game are as follows. Each of the n participants contributes e or nothing to a c o m m o n pool. If participation exceeds or equals a critical number c (c < n) all players are paid ke, where k > 1. In this event contributors end with ke and noncontributors with e + ke. If, however, participation is less than c, no payment is made. In this event contributors end up with 0 and noncontributors with e. The pareto-optimal outcome corresponds to exactly c contributions. Thus, participation less than c is futile, while participation greater than c is successful but inefficient. The view that participants are purely selfish immediately implies noncontribution, since by not contributing one is guaranteed e and if enough others contribute she gets e + ke. If every agent is selfish and this is c o m m o n knowledge, no one contributes. This is the standard prediction in the one-shot game with full information.
Evidence T w o experimental papers (van de Kragt, Orbell & Dawes, 1983; Dawes, Orbell, Simmons & van de Kragt, 1986) examine group contribution in dilemma situations resembling the one described above. In both papers, e = $5.00, k = 2, n = 7, c = 3 or 5. Their experiments are one-shot and satisfy the full-information and simplicity requirements. The relevant results are summarized below. van de Kragt, Orbell, and Daws: (1983): 1. When c = 3, 8 out of 11 games are successful. Of the 11 games 5 are optimal (participation = 3), 3 over-provide and 3 under-provide. 2.
When c = 5, 14 out of 23 games are successful. Of the 23 games, 5 are optimal, 9 over-provide and 9 under-provide.
3.
Pooled across all games (c = 3 and c = 5) the number of persons contributing is approximately 65 percent.
Dawes, Orbell, Simons, and van de Kragt (1986) 8 1. When c = 3, 7 out of 10 games are successful. Of the 10 games 3 are optimal, 4 over-provide and 3 under-provide. 2.
When c = 5, 4 out of 10 games are successful. Of the 10 games 2 are optimal, 2 over-provide and 6 under-provide.
3.
The percentage contributing are: 51% in c = 3 games and 64% in c = 5 games.
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The high contribution rates (relative to the zero standard prediction) are conspicuous. In both papers there is a remarkable similarity in the high contribution rates. The observed rates of contribution are about 60%, on average. U L T I M A T U M GAMES
Consider a simple game of division where a player is given the right to allocate a sum of money between herself and another anonymous player. If the recipient accepts the offer, the sum of money is divided accordingly; if she rejects the offer both players receive nothing. The game-theoretic solution is that the recipient accepts any positive offer, and therefore the actual offer will be accordingly very small. This prediction is valid if players are purely selfish. A number of experiments that conform to the above mentioned game report very high percentage of equal splits among the participants; this phenomenon is documented in Selten (1978), Guth, Schmittberger, and Schwarze (1982), Hoffman and Spitzer (1982, 1985), and Kahneman, Knetsch, and Thaler (1987). One view is that fairness is induced by the threat of rejection. Kahneman, Knetsch and Thaler (1987) conduct an experiment where a subject is asked to allocate $20 between herself and another anonymous player with no possibility of rejection. There were two choices: $18 to herself and $2 to the other or $10 each. Of the 161 subjects 122 or 76% opted for the equal split. This percentage is not very different from experiments that include the threat of rejection. In another set of experiments Kahneman et al. (1987) find a strong tendency to punish an unfair allocator. About 74% of the 161 students gave up $1 to punish an unfair allocator. In another group, 81% of 32 students behaved the same way. These experimental results suggest that the high percentage of equal splits is not engendered solely by the threat of rejection. MULTISTAGE GAMES Consider multistage games that have recently attracted much attention. Two players bargain about the division of a pie where one makes an offer and the other accepts or rejects. Rejection takes the game into a second round. The authority to make offers alternates between the players and the pie shrinks in each successive round. If an agreement is not reached by the last specified round, both players receive nothing. This is a version of the Stahl/Rubinstein model that has been experimentally tested by Binmore, Shaked and Sutton (1985) and Neelin, Sonnenschein and Spiegel (1988). The experiments in Neelin et al. (1988) involved three games--two rounds, three rounds and five rounds. All three games have the same first round pie ($5) and the pie declines in successive rounds as follows: In the two rounds game the second period pie is 1.25; in the three rounds game the second and third period
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pies are 2.50 and 1.25, respectively; in the five rounds game the second, third, fourth and fifth period pies are 1.70, .58, .20 and .07, respectively. The game-theoretic prediction is that in the first round the first player (with the authority to make an offer) will propose 3.75 to herself and 1.25 to the second player. This theoretically predicted split based on backward induction holds across all three games. Consider the experimental evidence in Neelin et al. (1988). In the two round game 33 out of 40 proposed splits in the range 3.50-3.75 to the first and 1.20-1.50 to the second player. In the three round game 28 out of 40 proposed the equal split. In the five round game 33 out of 40 proposed splits in the range 3.00-3.50 to themselves and 1.50-2.00 to the other player. It is evident that players do not follow the predictions of the theory. The three round game involves the most obvious violation; players select equal split which is 100% away (2.50 rather than 1.25) from the predicted value to the recipient. In the two and five round games the evidence appears to be closer to the theoretical predictions. However, it is entirely possible that players select an amount that is based on their perception of fairness rather than the result of self-interested behavior. In fact, we later suggest that players seem to be coordinating their actions around a fair equilibrium. We should mention, however, that the experimental results, as Neelin et al. (1988) indicate, is also consistent with a non-fairness conjecture: first players propose divisions that leave their opponents with shares equal to the value of the second round pie. This conjecture that players act myopically is difficult to reject on the basis of their results. There is one important caveat, however. If the second round pie is strictly greater than 2.5, would the first player still propose to leave their opponents with the second round pie? Consider a different three round game with $5, 3, 1.75 as the pie in the first, second and third rounds, respectively. Note that the theoretical prediction is identical to the other three games. Would the first player propose $3.00 to her opponent and $2.00 to herself as the myopic conjecture requires? 9 This suggests that myopic behavior for some parameter values may be the manifestation of a more general phenomenon. MARKET FAIRNESS Fairness in exchange has a long history. Even primitive societies shunned certain types of transactions that were deemed to be disruptive of community solidarity. In archaic society, following the dissolution of tribal society, there were fewer bans on economic transactions but exchange was subject to "just price." Polanyi (1977) notes, "From the early Assyrian trade colonies, the laws of Eshnunna and the Code of Hammurabi, down to the Mishna and the Babylonian Talmud of some 2500 years later; indeed, up the time of Thomas Aquinas, if not considerably longer, the just price remained the only rate at which transactions were deemed legitimate" (p. 74). Indeed, the just price doctrine prevailed in the grain markets in
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England as late as the 18th century. Though gradually discarded, it was appealed to in times of scarcity. Also, Levy (1964) notes that the Famous Edict of Prices, decreed by Diocletian in AD 301, contained a table of thousands of maximum prices for commodities and services with meticulous distinctions according to their quality. In defining market fairness, surveys seem to suggest that normal profit is the benchmark. In this vein, attempts to increase profits above this level are unfair if firms have no justified claim on the additional surplus. A technological innovation that reduces the firm's costs, however, qualifies the firm as a claimant and the price need not be lowered in the short run. Also, raising price in an attempt to maintain normal profit is perceived as fair. Thus, if cost of production goes up firms can respond by raising price to maintain profits. These propositions are strongly supported by the survey data in Kahneman et al. (1986). 10 Fairness thus imposes discipline in the marketplace, prohibiting opportunistic profit seeking but allowing the pursuit of fair gains.
COMPETITIVE-FAIRNESS Concerns for fairness evidenced in dilemma games, ultimatum, multistage games, and some market situations suggest a pattern: it appears that self-interested behavior is more common when some basic moral preconditions are satisfied. This view is also prominent among socio-economist. The idea is that people pursue economic gains mostly when a moral precedent--fairness--is first met. When fairness preconditions fail, self-interest seems to be supplanted by simple rules of thumb, like equal-sharing or other such allocations suggested by the game. As if unhappy with the lack of moral prerogative, players attempt to implement a common notion of fairness that is generally known and acceptable to everyone. Such sequencing of fairness and self-interest accords fairness the status of moral precondition and leads to a conception of "dignified self-interest" where people may be "programmed" to pursue fair gains. The view that fairness matters, in our opinion, strengthens the central message of economics. Efficiency of resource allocation is actually improved if men pursue dignified self-interest rather than pure selfishness. Enormous waste, in terms of missed cooperative opportunities, and the high costs of defining and implementing sophisticated agreements, illustrates the relative inefficiency of the purely selfish society. 11 Because this conception of fairness functions as a broad discipling mechanism, similar to a competitive market, we find the label "competitive-fair" appropriate. Where markets fail due to monopoly, information problems, and externalities, competitive-fairness purports to achieve an efficient outcome, albeit perhaps gradually. This view also suggests a course of action to regulators and policy makers that leads to greater social efficiency. We next suggest that such fairness is indeed based on moral foundations.
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Consider the dilemma game and its evidence discussed earlier. Such games involve an externality problem where payoffs depend on others' actions. Fairness, however, overcomes this difficulty if moral preconditions require equality of payoffs. We assume that all n players are fair and this is common knowledge. Two candidates satisfy fairness criterion: no contribution and full contribution. In the first case, everyone is left with their endowment, e; in the second case, every one contributes and gets e + ke. Note that in both cases all players receive the same welfare. This coordination problem, involving choice between two fair allocations, is distinct from the zero contribuition prediction of the standard model. Here, players are likely to look for aspects of the game that help them to coordinate their actions, serving as "focal" points. 12 One such item is the specification of the criticad level, c. When c is low, prospects of achieving the full contribution equilibrium are good, because the probability is high that the cooperative venture will succeed. However, when c is high the probability of success is low because a small departure from full contribution, by a very small percentage of players, may lead to failure. Therefore, it can be expected that when c is close to n, no one contributes and the zero-contribution is the most likely outcome. If c is neither very low nor very high, contribution rates are expected to be significant though not 100%. This is the prediction of the competitive-fair model based on the view that players are morally conditioned. 13 The observed contribution rates are about 60%, on average, and conform to these predictions. Also, as expected, the rate of success of the cooperative venture falls as the critical level (c), the suggested focal point, increases. 14 In the multistage games the designs and payoffs seem to violate basic notions of fairness. Recall that players are arbitrarily chosen to take on the role of the allocator and the pie shrinks in successive rounds, giving unjustified rewards to the first player. If moral prerogatives are relevant, players search for equilibria that are moral and also mutually acceptable. Experimental work by Hoffman and Spitzer (1985) suggests that players view simple randomization (of the authority to allocate) to be arbitary and in conflict with their moral conditioning. In their one-stage bargaining model, they find a majority (about 62%) of the allocators, determined by the flip of a coin or by the outcome of a simple game, opted for approximately the equal split. In contrast, such allocators when told that they had "earned the right" (moral authority) behaved more like the "economic man." An interesting result of their study is that given moral authority, allocators determined by winning a game were more aggressive than those that won the toss of a coin. The sequencing of moral authority and superiority at the game somehow legitimized the right to be the allocator. As if moral authority gives one a better claim which is then validated by a win that involves superior effort or talent. Such players felt free to pursue economic gains and were thus more assertive in their behavior.
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In multistage games, therefore, players attempt to converge to a mutually acceptable moral equilibrium. This clearly requires coordination and players are likely to search for focal points in the game. In this regard, the second round pie happens to be an obvious candidate. To be precise, fairness suggests that players will converge to the minimum of the second round pie or the equal-share. Thus, the recipient will receive either approximately the second round pie or 2.50, whichever is less. As mentioned earlier, the results in Nelin et al (1988) confirm this prediction. 15 To consider market fairness and its moral prerequisites, imagine a market that is generally competitive but is confronted with a temporary scarcity. Suppose that the industry is in long run equilibrium and firms earn normal profits. Following a positive shock to demand suppose that output stays fixed. Usually, price rationing scheme is viewed as the most efficient because: (i) the available output is allocated to the most willing, and (ii) the short run market clearing price serves as an appropriate signal in expanding output. A strong case against price rationing can be made if scarcity is temporary and fairness is relevant. The reasons are: (i) Higher price does not serve as signal to increase future production; the higher profit is thus viewed as an end in itself, not as means to an end, (ii) though most willing buyers get the product, this becomes less important if buyers identify themselves as a group distinct from sellers. Because buyers are the primary losers, if fairness is relevant, one asks: why should an unaffected party (the seller) benefit from a mere allocative process? Stated differently, the seller has no moral claim on the additional consumer's surplus generated by the increased demand. 16 In fact, fairness may even imply that a queue dominates a lottery, which in turn dominates price rationing. With respect to the first two, the additional consumer's surplus goes to buyers rather than the seller. A queue has the additional advantage of allocating the product to those who want it most rather than random assignments due to the lottery scheme. FAIRNESS AS CONVENTION An alternative view of fairness is that it is not driven by either moral precedents or by full rationality, it is simply a durable convention. This conception is popularized by Ullman-Margalit (1977), Sugden (1986, 1989), and Young (1993a,b). In fact, its lineage can be traced to Hayek (1960, 1979) where the author argues that beliefs and institutions, including morality, cannot be judged as absolutes. Often taking a game-theoretic approach this literature suggests that some conventions, notably fair division and distributive justice, are stochastically stable and survive alternative conventions. In this view it is noteworthy that stability of convention is the primary reason for the prevalence of fairness. From this perspective, "fairness as convention" is morally and rationally neutral. We next outline the key ideas of this hypothesis.
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Three elements are essential in leading to stable conventions: bounded rationality, interactions among individuals, and random disturbances. Bounded rationality captures the idea that people have rational intentions but are not entirely capable of knowing and figuring out every possible contingency. This may mean that people try to use information from the past to form expectations about an event. However, capacity for information absorption is limited; this is often captured simply by postulating that players in a game sample a fixed number of recent observations, and that old observations disappear. This has the effect of reducing inertia, and allows the evolution to a new convention by overturning old ones. If everyone follows recently observed behavior then an existing convention, say walking on the left side on a narrow walkway, may change in the long run simply because some newcomers started walking on the right side. Interactions, the second element of the convention hypothesis, are relevant because one must form expectations about the behavior of others in order to undertake suitable actions. Walking on the left side, if that is the convention, has to be learned via interactions with others; otherwise, one does not know which to select. When multiple rules or actions--left or right--are possible, conventions help to converge to a unique equilibrium. Because people before have chosen a particular rule and this information is available, it makes sense to follow the same convention. 17 Finally, there are shocks or mutations, the last of the three elements; they provide the impetus for change and evolution. The idea is that people are not fully rational and thus not perfectly predictible, occasionally deviating from the convention. Such disturbances allow realistic abberations in behavior and enable the emergence of new conventions. When some people mistakenly or unknowingly walk on the right, the convention can eventually change to a situation where everyone walks on the right. This also requires that people sample only recent observations and choose to follow the new action. In the natural world, the driving force of evolutionary change is mutation: mutations that are favored by natural selection thrive, outlive others, and establish significant changes. In the convention literature the analogue of natural selection is bounded rationality. Occasional deviant behavior may be reinforced by boundedly rational people because they feel that such actions are in their best interest, given limited information. It may be noted that mutations deriving from unpredictible behavior is also a manifestation of bounded rationality. Thus, bounded rationality is doubly significant in this literature. When the probability of mutation is positive but low, it turns out that conventions are highly stable. However, there is always some positive probability that conventions can change once mutations are allowed. In this framework it is possible that isolated societies with identical conditions may experience different conventions and thus different morality and fairness. Such path-dependent outcomes, however, are not permanent and do not exhibit historical lock-in. Young
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(1993a), Kandori, Mailath and Rob (1993) show that people within a population will mostly use the same convention if the probability of mutation is low, information is sufficiently incomplete, and all people have positive probability of interacting. When several populations or say isolated groups are considered that are similar in every way except that they do not interact with each other, the process may lead to different convention being used in different groups. What is particularly intersting is the notion that the equal-share rule itself may be a highly stable convention. Young (1993b) shows that of three possible outcomes of division between a landlord and a tenant in a sharecropping arrangement--75:25, 50:50, and 25:75--the 50:50 rule is the unique stochastically stable convention. This requires fairly reasonable assumptions: similarity of tastes and preferences and limited but identical information among landlord and tenants. Proponents of the fairness-as-convention view argue, at this juncture, that the equal-share principle persists because it is dynamically stable. RECIPROCITY AND FAIRNESS The idea that reciprocal behavior leads to fairness and cooperation is a well received notion in the economics literature. Opportunities for reciprocal behavior often allow repeated interactions among players and create an enforcement mechanism. This literature is closest to economists' views of self-interested behavior: players behave fairly and cooperate because it is in their best interest to do so; such behavior maximizes long run profits. What is particularly interesting is that in some situations there may be reciprocity and mutual concerns even in one-time transactions. Conceptually, this transcends fairness induced by the prospect of repeated play. We next turn to such inspirations. Fairness is often motivated by psychological beliefs about others' intentions. Examples are: tipping a waiter because he cares about my utility, rewarding an exceptionally loyal worker even when it is not in the manager's self-interest, not exploiting the full consumers' surplus even when possible because the consumer may be upset. Rabin (1993) proposes a model of fairness based on such themes-people favor those who care for them and hurt those who have ill feelings; often the same people who reciprocate favors may hurt others in retaliation for their hurtful sentiments. To model such behavior, Rabin develops a game-theoretic framework where beliefs about other player matter. Such psychological games have the advantage of predicting how a player acts when she is confronted with fair or malicious intentions of the other player. Consider the case of monopoly pricing. It has often been argued that a monopolist concerned about fairness will set its price below the conventional monopoly price. Khaneman et al (1986) argues that fairness is a realistic constraint on profitmaximizing behavior and causes firms to set prices differently from the prediction of the conventional model. Rabin's model allows an examination of this intuition.
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Using this framework, the author shows that when the monopolist takes into account the demands of the consumer for fair price, the highest price consistent with fairness is strictly less than the value of the product to the consumer. In this situation the highest price is less than the conventional monopoly price. Also, the author shows that the higher the monopolist's costs, the greater the equilibrium fair price that the consumer is willing to pay; an idea that conforms to the surveys in Khaneman et al (1986). Another interesting example is in the area of labor economics; consider giftexchange equilibrium discussed by Akerlof (1982). Imagine a situation where effort is costly to the worker but essential in producing output. Also, suppose that benefits are costly to the firm but valued by the worker. It is possible to construct examples where the dominant strategy for the worker and the firm involve least effort and least benefit. This would be the conventional "unkind" equilibrium. Once fairness concerns are added, however, the outcome changes. Rabin shows that the introduction of mutual fairness concerns lead to better effort and better benefits. The key to this improvement is that the two parties reciprocate favors on the basis of beliefs: worker offers higher effort in anticipation of better benefits, and firm offers better benefits in anticipation of higher effort. In equilibrium better effort and benefits are delivered and beliefs are validated. Finally, it may be noted that the conclusions of this literature suggest that fairness concerns have greater impact on equilibrium behavior when individual sacrifices are small. In other words, people forgo some of their own benefits to reward those who are helpful and penalize others who are hurtful, mostly when their own costs are small. If the stakes are large, either in helping or in hurting, then individuals tend to be less reciprocating, as if they succumb to the larger motivations of personal welfare. This result is often viewed as a weakness. However, it may be noted that in decentralized markets small concerns for fairness may have significant cumulative effects. If fairness is common knowledge and it is reciprocated by similar behavior, then the resulting fairness equilibrium may be significantly different from standard predictions.
CONCLUDING REMARKS Concerns for fairness seem to be quite prevalent. Three broad motivations of fairness are discussed in the paper: moral prerequisites, stable convention, and reciprocity. While the first source derives from morality, the second motivation of fairness is morally neutral. Reciprocity is mostly driven by psychological beliefs and is closer to the model of self-interest; it is also partly moral because players feel obligated to reciprocate, sacrificing some of their personal gains. Also, competitive-fair behavior is not devoid of self-interest impetus; once the moral underpinnings have been satisfied, players seem to be free to pursue economic gains.
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Despite the diversity of ideas, their origins, and frameworks, these conceptions o f f a i r n e s s a r e n o t m u t u a l l y e x c l u s i v e a n d n o t c o n t r a d i c t o r y . It is e n t i r e l y p o s s i b l e that f a i r n e s s is m o r a l l y m o t i v a t e d a n d is o f t e n p e r p e t u a t e d b y p s y c h o l o g i c a l e x p e c t a t i o n s , p r o v i d i n g it t h e status o f a c o n v e n t i o n . W i t h i n t h e c o m p e t i t i v e - f a i r h y p o t h e s i s , s e l f - i n t e r e s t e d b e h a v i o r p l a y s a p r o m i n e n t r o l e o n c e t h e c o n v e n t i o n is e n t r e n c h e d a n d m o r a l f o u n d a t i o n s a r e m e t . T h e e v o l u t i o n a r y v i e w is a l s o u s e f u l e s p e c i a l l y in the l o n g run; it s u g g e s t s the d y n a m i c s o f c h a n g e that l e a d to e v l o v i n g m o r a l s t a n d a r d s a n d p s y c h o l o g i c a l b e l i e f s in t h e p u r s u i t o f f a i r b e h a v i o r .
Acknowledgments: I thank Richard Hattwick, Bernie Herber, Jack Hirshleifer, Betsey Hoffman, Mark Isaac, Stan Reynolds, Amartya Sen, Gordon Tullock, Oliver Williamson, and Edward Zajac for helpful comments on earlier drafts. The usual disclaimer applies.
NOTES 1.
2. 3.
4. 5.
6.
7.
8.
The view that man is selfish is often attributed to Adam Smith. In fact, Smith had hoped to complete the grand synthesis with the "general principles of law and government and of the different revolutions they had undergone in the different ages and periods of society." This appears in the concluding paragraph (in the last few editions) and in the advertisements of the sixth edition (1790) of Moral Sentiments, also the year of Smith's death. Smith is not a proponent of selfish behavior; this also becomes more clear when Theory of Moral Sentiment (1759) and Wealth of Nations (1776) are considered as parts of a greater whole. Sen also holds that Smith was not referring to pure selfishness as the main motive of human behavior; see Klamer (1989). Also, see Campbell (1971). Fairness concerns are also widespread in the regulatory environment; see Zajac (1985). Philosophers, notably Rawls (1971) and Gauthier (1986) attempt to show that morality can be rational. For Rawls it is more of an assumption that the theory of justice is moral. This is achieved by invoking the "veil of ignorance." In Gauthier it is part of the contractarian enterprise. This, however, raises the question whether issues like morality, justice, and fairness are to be explained within a rational framework or simply taken as norms that people follow. For additional discussions on these issue, see Sugden (1986, 1993). It should be understood that this paper is simply an attempt to capture some prevailing notions of fairness, not defending a pattern of distributive justice. Also, Akerlof and Yellen (1990) argue that fair-wage is important for productivity. In the absence of fair behavior, product quality or work effort may suffer, resulting in suboptimal profits. In a more general context Axelrod's reciprocal altruism (1984) suggests that players use tit-for-tat strategy to retaliate against deviant behavior. However, as mentioned earlier, the analysis does not include a detailed discussion of fairness that results from coordination made possible via the existence of long term enforcement mechanisms. The reason for this choice is that such notions of fairness are well understood; also, they are almost indistinguishible from self-interested behavior. Simplicity is essential since fairness may require that each agent knows the endowments and payoffs of all other agents. Roth and Malouf (1979) examine experimental evidence when information is incomplete. Also, simplicity translates to less complex calculations for subjects. Dawes, Orbell, Simmons, & van de Kragt (1986) report another set of experiments where they find lower contribution rates. They required subjects to reveal their own probability estimates for three possible situations: failure, exact success, and beyond success. This experimental
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10.
I1. 12. 13.
14.
15. 16. 17.
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exercise, in our opinion, suggests to the subjects the model that the authors want to test. Because of this possible problem, we do not summarize those results. A clear answer must wait further experimental work. However, a careful look at the distribution of offers in Neelin et al. (1988) suggest that this would be very unlikely. Note that a very significant number offered slightly more than the second round pie to their opponents in the two round (18 out of 40) and five round (15 out of 40) games. In the three round game, however, only a small number (4 out of 40) offered anything greater than the second round pie of 2.50. In a market situation, concerns for fairness may be quite pervasive. However, market interactions are impersonal compared to games discussed earlier. Therefore, the strain between fairness and self-interest is less conspicuous. Perhaps because of this subdued conflict, there is little in the way of direct empirical evidence. Akerlof (1970), Arrow (1973, 1975) suggest the importance of trusted relationships; some markets may function poorly because of the lemons problem. See Schelling (1960). Cooperation could also succeed because of reciprocal altruism (Axelrod, 1984) or the perception that one's opponent is irrational (Kreps, Milgrom, Roberts, & Wilson, 1982). While these theories explain cooperation in repeated games, their arguments actually suggest that there should be no cooperation in one-shot games. Most experiments relating to dilemma situations cannot be used to support or contradict the fairness principles. Such studies examine subject and group behavior in more complex games involving: any amount between 0 and e, absence of a critical number of persons or dollars required (often called provision point), inadequate information, and dynamic games. We feel that one-shot games with full-information are ideal candidates that manifest clearly the concerns for fairness postulated in this paper. For additional experimental evidence see Isaac and Walker (1988). Myopia requires that the second round pie is chosen, this is different from fairness. The perception would be different, however, if sellers' actions led to a different consumer's surplus, like better warranties generating increased demand. This of course assumes that everyone choosing the same equilibrium does not lead to congestion. Note that in the absence of interactions, conventions are not particularly useful because there is nothing to coordinate and thus nothing to learn.
REFERENCES Adams, J.S. (1965). Inequality in social exchange. In L. Berkowitz (Ed.). Advances in Experimental Social Psychology. New York: Academic Press. Akerlof, G.A. (1970). The market for lemons: Quality uncertainty and the market mechanism. Quarterly Journal of Economics, 84, 488-500. Akerlof, G.A. (1980). A theory of social custom of which unemployment may be one consequence. Quarterly Journal of Economics, 94, 749-75. Akerlof, G.A. (1982). Labor contracts as partial gift exchange. Quarterly Journal of Economics, 97, 543-69. Akerlof, G.A. & Yellen, J. (1990). The fair wage effort hypothesis and unemployment. Quarterly Journal of Economics, 105, 255-284. Arrow, K. (1973). Social Responsibility and Economic Efficiency. Public Policy, 21,303-17. Arrow, K. (1975). Gifts and exchanges. In E. Phelps, (Ed.), Altruism, morality, and economic theory (pp. 13-28). New York: Russel Sage Foundation. Axelrod, R. (1984). The evolution of cooperation. New York: Basic Books.
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Binmore, K, Shaked, A, & Sutton, J. (1985). Testing noncooperative bargaining theory: A preliminary study. American Economic Review, 75, 1178-80. Blau, P.M. (1964). Exchange andpower in social life. New York: Wiley. Campbell, T.D. (1971). Adam smith's science of morals. London: Rowman and Littlefleld. Dawes, R, Orbell, J, Simmons, R., & van de Kragt, A. (1986). Organizing groups for collective action. American Political Science Review, 80, 1171-1185. Dawes, R.M. & Thaler, R.H. (1987). Anomalies: Cooperation. The Journal of Economic Perspectives, Summer, 2, 187-197. Etzioni, A. (1988). The moral dimension. New York: The Free Press. Frank, R. (1987). If homo economicus could choose his own utility function, would he want one with a conscience? American Economic Review, 77, 593-604. Gauthier, D. (1986). Morals by agreement. Oxford: Oxford University Press. Guth, W, Schmittberger, R., & Schwarze, B. (1982). An experimental analysis of ultimatum bargaining. Journal of Economic Behavior and Organization. 3, 367-88. Hamilton, W.D. (1964). The genetic theory of social behavior. Journal of Theoretical Biology, 7, 132. Hayek, F. (1960). The constitution of liberty. London: Routledge and Kegan Paul. Hayek, F. (1979). Law, legislation and liberty (vol. 3). London: Routledge and Kegan Paul. Hirshleifer, J. (1977). Economics from a biological viewpoint. Journal of Law and Economics, 20, 1-52.
Hirshleifer, J. (1978a). Competition, cooperation and conflict in economics and biology. American Economic Review Proceedings, 68, 238-243. Hirshleifer, J. (1978b). Natural economy versus political economy. Journal of Social and Biological Structures, 1, 319-337. Hirshleifer, J. (1987). The emotions as guarantors of threats and promises. In J. Dupr6 (Ed.), The latest on the best: Essays in evolution and optimality, Cambridge, MA: MIT Press. Hoffman, E. & Spitzer, M. (1982). The coase theorem: Some experimental tests. Journal of Law and Economics, 25, 73-98. Hoffman, E. & Spitzer, M. (1985). Entitlements, rights and fairness: An experimental examination of subject's concepts of distributive justice. Journal of Legal Studies, 14, 259-297. Homans, G.C. (1961). Social behavior: Its elementary forms. New York: Harcourt, Brace, Jovanovich. Isaac, M, & Walker, J. (1988). Group size effects in public goods provision: The voluntary contribution mechanism. Quarterly Journal of Economics, 103, 179-199. Kahneman, D., Knetsch, J., Thaler, R. (1986). Fairness as a constraint on profit seeking. American Economic Review, 76, 728-741. Kahneman, D., Knetsch, J., Thaler, R. (1987). Fairness and the assumptions of economics. In Hogarth, R.M. & Reder, M.W. (Eds.), Rational choice. Chicago and London: The University of Chicago Press. Kandori, M., Mailath, M., & Rob, R. (1993). Learning, mutation, and long-eun equilibria in games. Econometrica, 61, 29-56. Klamer, A. (1989). A conversation with Amartya Sen. The Journal of Economic Perspectives, 3, 135-150. Kreps, D., Milgrom, P., Roberts, J., & Wilson, R. (1982). Rational cooperation in finitely repeated prisoner's dilemmas. Journal of Economic Theory, 27, 245-252. Levy, J. (1964). The economic life of the ancient world. Chicago and London: The University of Chicago Press. Neelin, J., Sonnenschein, H. & Spiegel, M. (1988). A further test of noncooperative bargaining theory: Comment. American Economic Review, 78, 824-36. Nozick, R. (1974). Anarchy, state and utopia. New York: Basic Books.
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Okun, A. (1981). Prices and quantities: A macroeconomic analysis. Washington DC: The Brookings Institution. Polanyi, K. (1977). The livelihood of man. New York: Academic Press. Rabin, M., (1993). Incorporating fairness into game theory and economics. American Economic Review, 83, 1281-1302. Rawls, J. (1971). A theory of justice. Cambridge, MA: Belknap Press of Harvard University Press. Roth, A. & Malouf, M. (1979). Game-theoretic models and the role of information in bargaining. Psychology Review, 86, 574-594. Roth, A. (1988). Laboratory experimentation in economics: A methodological overview. Economic Journal, 98, 974-103 !. Schelling, T. (1960). The strategy of conflict. Cambridge: Harvard University Press. Selten, R. (1978). The equity principle in economic behavior. In H. Gottinger & W. Leinfellner (Eds.), Decision theory and social ethics, issues in social choice (pp. 289-301). Dordrecht: Reifel Publishing. Sen, A.K. (1977). Rational fools: A critique of the behavioral foundations of economic theory. Journal of Philosophy and Public Affairs, 6, 317-344. Smith, A. (1966). The theory of moral sentiments (reprints of Economic Classics). Augustus M. Kelly Publishers, New York, 1966. First published 1759. Smith, A. (1776). The wealth of nations. Sugden, R. (1986). The economics of rights, cooperation and elfare. Oxford: Basil Blackwell. Sugden, R. (1993). Rationality and impartiality: Is the contractarian enterprise possible? In D. Gauthier & R. Sugden (Eds,), Rationality, justice and the social contract. Ann Arbor, MI: University of Michigan Press. Thaler, R.H. (1988). Anomalies: The ultimatum game. Journal of Economic Perspectives, 2, 195206. Trivers, R.L. (1971). The evolution of reciprocal altruism. Quarterly Review of Biology, 46, 35-57. Ullman-Margalit, E. (1977). The emergence of norms. Oxford: Oxford University Press. van de Kragt, A., Orbell, J., & Dawes, R. (1983). The minimal contributing set as a solution to public goods problems. American Political Science Review, 77, 112-22. Wilson, E. (1978). On human nature. Cabridge, MA: Harvard University Press. Wilson, J.Q. (1993). The moral sense. New York. The Free Press. Young, P. (1993a). The evolution of conventions. Econometrica, 61, 57-84. Young, P. (1993b). An evolutionary model of bargaining. Journal of Economic Theo~, 59, 145168. Young, P. (1996). The economics of convention. Journal of Economic Perspectives, 10, 105-122. Zajac, E.E. (1985). Perceived economic justice: The example of public utility regulation. In P.H. Young (Ed.), Cost allocation: Methods, principles and applications. Amsterdam: North Holland.
ESKANDERALVI* Western Michigan University This paper provides an assessment of some fairness notions that are particularly relevant to economics of the marketplace. Motivations of fairness are also discussed. In this vein, three sources of fairness are outlined: moral precepts, stable convention, and reciprocity. Some suitable theoretical and empirical evidence are presented in support of these views. Economic models based on the view that man is purely selfish have performed poorly in some areas, particularly game theory and voluntary contributions to public goods. In other social sciences, notably in psychology, political science, and sociobiology researchers have also encountered systematic deviations from purely selfish behavior. There is ample evidence that both fairness and self-interest matter, It is hoped that this paper will provide a better comprehension of the tensions and complementarities between fairness and self-interest and improve our understanding of human behavior.
ABSTRACT-
INTRODUCTION The purpose of this paper is to present different notions of fairness that prevail in the economics literature, discuss their relationship to self-interest, and suggest their motivations. The tensions and complementarities between fairness and selfinterest may represent fertile grounds for understanding the foundations of economic behavior. Self-interest clearly needs little in the way of introduction; it has been firmly entrenched in Economics, and to a lesser extent in Psychology, Sociology, and Political Theory. Yet it has become increasingly transparent that fair behavior is valued in societies and can be found even in unexpected situations. It *Direct all correspondence to: Eskander Alvi, Department of Economics, Western Michigan University, Kalamazoo, MI 49008; e-mail: [email protected]. Journal of Socio-Economics, Volume 27, No. 2, pp. 245-261 Copyright © 1998 by JAI Press, Inc. All rights of reproduction in any form reserved. ISSN: 1053-5357
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may be noted that the emphasis is on basic notions of fairness that prevail without the existence of any enforcement mechanisms and may be observed even in onetime transactions. Where enforcement arrangements are present, fairness is easier to explain and is often consistent with long term self-interested behavior. The standard practice in the social sciences, particularly in economics, is to view selfishness as the dominant motive for human action. While the predictions of economic models based on selfishness have done very well in some areas, they have also failed in other areas. The systematic deviations from the predictions of economic theory observed in experiments are most noteworthy in areas of game theory and social dilemma situations. Economists and other social scientists have made some attempts at understanding the basic foundations of human behavior. These attempts have taken two broad routes: conceptual and empirical. Conceptual ones appear in a variety of fields; socio- economics, evolutionary biology, game theory, ethics, political theory, all try to understand the basic foundations of human behavior conceptually. Some interesting attempts have also been made in the evolutionary biology literature. Basically, the idea is that social interaction and behavior are not unique to man. Therefore, general principles governing the behavior of animal species may provide valuable insights about the causes and motivations of our own behavior. Some noteworthy attempts in this area were made by sociobiologists--Hamilton (1964), Trivers (1971) and Wilson (1978). Jack Hirshleifer (1977, 1978a, 1978b, 1987) has made several remarkable attempts in examining the links between economics and biology. Robert Frank (1987), following the sociobiologists' approach, concludes that in some situations "gains from cooperation cannot be fully exploited...unless one adopts at the outset what everyone would call a genuinely unselfish point of view" (p. 602). This also reflects Amartya Sen's (1977) view that people who are selfishly rational are "rational fools. ''l The general theme in this paper is that there are three broad sources of fair behavior: moral precept, convention, and reciprocity. The first idea has a long tradition in economics and the social sciences and states that fairness is driven by moral prerogatives. Such a conception of fairness is evident in Adam Smith's Theory of Moral Sentiments (1759) and is also central to the socio-economics view. Socio-economists discuss fairness as a moral prerequisite that cannot be derived from other principles. Etzioni (1988) argues that there are at least two irreducible sources of utility, referring to self-interest and morality. Also, Wilson (1993) suggests that moral foundations of behavior are very relevant. Basically, the premise is that moral underpinning must be satisfied for the pursuit of economic behavior. The second conception is that fairness is a stable convention brought about by an evolutionary process. Three elements are usually required to run the evolutionary model: limited rationality, interactions among members, and random change. From a causal perspective, this idea is mostly devoid of moral and rational under-
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pinning. Because a stable convention persists for a long time once established, this literature suggests that people usually rationalize the convention in terms of morality and fairness. Origins of this idea can be traced to Hayek (1960, 1979) and has been popularized by Ullman-Margalit (1977), Sugden (1986, 1993), and Young (1993a, 1996). Finally, fairness can also be the result of reciprocity: people help those who are helpful and hurt those who are hurtful to them. This conception of fairness is closer to the model of self-interested behavior and implies that people sacrifice personal gains to help or hurt others. Though this is somewhat similar in spirit to the idea that fairness is induced via an enforcement mechanism, this conception of fairness can also have behavioral implications in one-shot games. Rabin (1993) constructs such a model of fairness where psychological beliefs are capable of coordinating actions. If I believe that my waiter cares for me while dining, and the waiter believes that I am sensitive to his needs, then it may be possible to have good service complimented by a regular gratuity. In this way, beliefs may help overcome the unkind equilibrium involving zero caring and sensitivity. The empirical literature, particularly in the areas of game theory and voluntary contributions to public goods, has directly and indirectly put to test the basic assumption of selfishness. In a variety of economic and social situations, the behavior of experimental subjects has been observed to systematically deviate from the predictions of the relevant theory. Several of these experiments are documented in Alvin Roth (1988), Richard Thaler (1988) and Dawes and Thaler (1987). Surveys reported in Kahneman, Knetsch and Thaler (1986) reveal significant concern for fairness. Also, there is support for the view that fairness is engendered by moral preconditions. Subjects often systematically forgo gains when games do not seem to conform to some basic moral prerequisites. Once the moral dimensions are met, indeed subjects are found to behave more as economic man.2 We suggest the term "competitive-fairness" to describe fairness motivated by moral underpinning and consistent with self-interested behavior in the market environment. As the name suggests, this notion is not divorced from the market and is not contrary to self-interest. We argue that such a conception of fairness complements economic efficiency by providing safeguards and checks against noncompetitive elements. It may be noted that such social predisposition provides pervasive discipline in the marketplace and helps achieve better allocation of resources. In the next section, we begin with some general notions of fairness and then discuss those that are relevant to the market mechanism. Applications relating to social dilemma games, ultimatum and multistage games, and markets are also discussed followed by the view that fairness and fairness as reciprocal behavior as well as its foundations.
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Notions of Fairness Most discussed concept of fairness is that of distributive justice. In this regard a variety of distributive concepts--based on effort, ability, merit, need, common good--have been discussed in the social sciences. Among sociologists and psychologists, the equity theory--reward in proportion to input or effort--is mostly accepted as the basis of distribution that prevails in most societies. This is most prominent in Homans (1961), Blau (1964), and Adams (1965). Contemporary political philosophers, Rawls (1971), Nozick (1974), and Gauthier (1986) defend other principles of distribution. Most concepts of distributive justice, however, go beyond the basic principles of the market. Important exceptions are Nozick (1974) and Gauthier (1986), both defend the entitlement principle in line with the importance of the market. 3 Equity is often thought to be an important ingredient in a market system i.e., it is believed that "reward in proportion to input" occurs in a freely functioning market. While this may be true in some situations, and perhaps generally desirable, it is clearly not automatically implied by the free operation of markets. Working hard or putting in a lot of effort does not automatically mean higher rewards. 4 Also, fairness can be complementary to self-interest. Along this vein, fair behavior is often viewed as important to the maximization of long run profits (Akerlof, 1980, 1982; Okun, 1981). Okun (1981) suggests that when repeat business is important, fair behavior is in the best interest of firms. Akerlof (1980, 1982) argues that firms care for their reputation and invest to create high work morale and customer goodwill. A key element in this argument is that long-term relation between the transacting parties serves as the enforcement mechanism, rewarding fair and penalizing unfair behavior. 5 In this paper, however, we examine fairness within regular economic institutions that involve mostly one-time transactions. 6 Kahneman, Knetsch, Thaler (1986) find widespread concerns for fairness even when there are no long-term relationships involved.
Conventional Economic Models and Fairness Concerns In this section conventional economic models exhibiting sharp tensions between self-interest and fairness are examined. The purpose is to evaluate if fairness concerns are prevalent and if moral prerequisites matter. The second aspect, however, is more thoroughly discussed in a later section. We next outline the thetry and some suitable evidence relating to dilemma games, ultimatum and multistage games, and some market situations.
DILEMMA GAMES Voluntary contributions to the public good and prisoner's dilemma are perhaps the most analyzed dilemma games. The essential feature of these games is that the payoffs to a participant depend mostly on the actions of others, such that individu-
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ally rational actions almost never lead to socially efficient outcomes. These dilemma games provide an excellent opportunity to study both selfish behavior and concerns for fairness. If fairness is relevant the outcome should be different from the theoretical predictions and may better explain the data. W e deliberately chose a simple dilemma game that has been experimentally tested. 7 Consider a one shot game between n players, each with initial e n d o w m e n t e. The rules o f the game are as follows. Each of the n participants contributes e or nothing to a c o m m o n pool. If participation exceeds or equals a critical number c (c < n) all players are paid ke, where k > 1. In this event contributors end with ke and noncontributors with e + ke. If, however, participation is less than c, no payment is made. In this event contributors end up with 0 and noncontributors with e. The pareto-optimal outcome corresponds to exactly c contributions. Thus, participation less than c is futile, while participation greater than c is successful but inefficient. The view that participants are purely selfish immediately implies noncontribution, since by not contributing one is guaranteed e and if enough others contribute she gets e + ke. If every agent is selfish and this is c o m m o n knowledge, no one contributes. This is the standard prediction in the one-shot game with full information.
Evidence T w o experimental papers (van de Kragt, Orbell & Dawes, 1983; Dawes, Orbell, Simmons & van de Kragt, 1986) examine group contribution in dilemma situations resembling the one described above. In both papers, e = $5.00, k = 2, n = 7, c = 3 or 5. Their experiments are one-shot and satisfy the full-information and simplicity requirements. The relevant results are summarized below. van de Kragt, Orbell, and Daws: (1983): 1. When c = 3, 8 out of 11 games are successful. Of the 11 games 5 are optimal (participation = 3), 3 over-provide and 3 under-provide. 2.
When c = 5, 14 out of 23 games are successful. Of the 23 games, 5 are optimal, 9 over-provide and 9 under-provide.
3.
Pooled across all games (c = 3 and c = 5) the number of persons contributing is approximately 65 percent.
Dawes, Orbell, Simons, and van de Kragt (1986) 8 1. When c = 3, 7 out of 10 games are successful. Of the 10 games 3 are optimal, 4 over-provide and 3 under-provide. 2.
When c = 5, 4 out of 10 games are successful. Of the 10 games 2 are optimal, 2 over-provide and 6 under-provide.
3.
The percentage contributing are: 51% in c = 3 games and 64% in c = 5 games.
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The high contribution rates (relative to the zero standard prediction) are conspicuous. In both papers there is a remarkable similarity in the high contribution rates. The observed rates of contribution are about 60%, on average. U L T I M A T U M GAMES
Consider a simple game of division where a player is given the right to allocate a sum of money between herself and another anonymous player. If the recipient accepts the offer, the sum of money is divided accordingly; if she rejects the offer both players receive nothing. The game-theoretic solution is that the recipient accepts any positive offer, and therefore the actual offer will be accordingly very small. This prediction is valid if players are purely selfish. A number of experiments that conform to the above mentioned game report very high percentage of equal splits among the participants; this phenomenon is documented in Selten (1978), Guth, Schmittberger, and Schwarze (1982), Hoffman and Spitzer (1982, 1985), and Kahneman, Knetsch, and Thaler (1987). One view is that fairness is induced by the threat of rejection. Kahneman, Knetsch and Thaler (1987) conduct an experiment where a subject is asked to allocate $20 between herself and another anonymous player with no possibility of rejection. There were two choices: $18 to herself and $2 to the other or $10 each. Of the 161 subjects 122 or 76% opted for the equal split. This percentage is not very different from experiments that include the threat of rejection. In another set of experiments Kahneman et al. (1987) find a strong tendency to punish an unfair allocator. About 74% of the 161 students gave up $1 to punish an unfair allocator. In another group, 81% of 32 students behaved the same way. These experimental results suggest that the high percentage of equal splits is not engendered solely by the threat of rejection. MULTISTAGE GAMES Consider multistage games that have recently attracted much attention. Two players bargain about the division of a pie where one makes an offer and the other accepts or rejects. Rejection takes the game into a second round. The authority to make offers alternates between the players and the pie shrinks in each successive round. If an agreement is not reached by the last specified round, both players receive nothing. This is a version of the Stahl/Rubinstein model that has been experimentally tested by Binmore, Shaked and Sutton (1985) and Neelin, Sonnenschein and Spiegel (1988). The experiments in Neelin et al. (1988) involved three games--two rounds, three rounds and five rounds. All three games have the same first round pie ($5) and the pie declines in successive rounds as follows: In the two rounds game the second period pie is 1.25; in the three rounds game the second and third period
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pies are 2.50 and 1.25, respectively; in the five rounds game the second, third, fourth and fifth period pies are 1.70, .58, .20 and .07, respectively. The game-theoretic prediction is that in the first round the first player (with the authority to make an offer) will propose 3.75 to herself and 1.25 to the second player. This theoretically predicted split based on backward induction holds across all three games. Consider the experimental evidence in Neelin et al. (1988). In the two round game 33 out of 40 proposed splits in the range 3.50-3.75 to the first and 1.20-1.50 to the second player. In the three round game 28 out of 40 proposed the equal split. In the five round game 33 out of 40 proposed splits in the range 3.00-3.50 to themselves and 1.50-2.00 to the other player. It is evident that players do not follow the predictions of the theory. The three round game involves the most obvious violation; players select equal split which is 100% away (2.50 rather than 1.25) from the predicted value to the recipient. In the two and five round games the evidence appears to be closer to the theoretical predictions. However, it is entirely possible that players select an amount that is based on their perception of fairness rather than the result of self-interested behavior. In fact, we later suggest that players seem to be coordinating their actions around a fair equilibrium. We should mention, however, that the experimental results, as Neelin et al. (1988) indicate, is also consistent with a non-fairness conjecture: first players propose divisions that leave their opponents with shares equal to the value of the second round pie. This conjecture that players act myopically is difficult to reject on the basis of their results. There is one important caveat, however. If the second round pie is strictly greater than 2.5, would the first player still propose to leave their opponents with the second round pie? Consider a different three round game with $5, 3, 1.75 as the pie in the first, second and third rounds, respectively. Note that the theoretical prediction is identical to the other three games. Would the first player propose $3.00 to her opponent and $2.00 to herself as the myopic conjecture requires? 9 This suggests that myopic behavior for some parameter values may be the manifestation of a more general phenomenon. MARKET FAIRNESS Fairness in exchange has a long history. Even primitive societies shunned certain types of transactions that were deemed to be disruptive of community solidarity. In archaic society, following the dissolution of tribal society, there were fewer bans on economic transactions but exchange was subject to "just price." Polanyi (1977) notes, "From the early Assyrian trade colonies, the laws of Eshnunna and the Code of Hammurabi, down to the Mishna and the Babylonian Talmud of some 2500 years later; indeed, up the time of Thomas Aquinas, if not considerably longer, the just price remained the only rate at which transactions were deemed legitimate" (p. 74). Indeed, the just price doctrine prevailed in the grain markets in
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England as late as the 18th century. Though gradually discarded, it was appealed to in times of scarcity. Also, Levy (1964) notes that the Famous Edict of Prices, decreed by Diocletian in AD 301, contained a table of thousands of maximum prices for commodities and services with meticulous distinctions according to their quality. In defining market fairness, surveys seem to suggest that normal profit is the benchmark. In this vein, attempts to increase profits above this level are unfair if firms have no justified claim on the additional surplus. A technological innovation that reduces the firm's costs, however, qualifies the firm as a claimant and the price need not be lowered in the short run. Also, raising price in an attempt to maintain normal profit is perceived as fair. Thus, if cost of production goes up firms can respond by raising price to maintain profits. These propositions are strongly supported by the survey data in Kahneman et al. (1986). 10 Fairness thus imposes discipline in the marketplace, prohibiting opportunistic profit seeking but allowing the pursuit of fair gains.
COMPETITIVE-FAIRNESS Concerns for fairness evidenced in dilemma games, ultimatum, multistage games, and some market situations suggest a pattern: it appears that self-interested behavior is more common when some basic moral preconditions are satisfied. This view is also prominent among socio-economist. The idea is that people pursue economic gains mostly when a moral precedent--fairness--is first met. When fairness preconditions fail, self-interest seems to be supplanted by simple rules of thumb, like equal-sharing or other such allocations suggested by the game. As if unhappy with the lack of moral prerogative, players attempt to implement a common notion of fairness that is generally known and acceptable to everyone. Such sequencing of fairness and self-interest accords fairness the status of moral precondition and leads to a conception of "dignified self-interest" where people may be "programmed" to pursue fair gains. The view that fairness matters, in our opinion, strengthens the central message of economics. Efficiency of resource allocation is actually improved if men pursue dignified self-interest rather than pure selfishness. Enormous waste, in terms of missed cooperative opportunities, and the high costs of defining and implementing sophisticated agreements, illustrates the relative inefficiency of the purely selfish society. 11 Because this conception of fairness functions as a broad discipling mechanism, similar to a competitive market, we find the label "competitive-fair" appropriate. Where markets fail due to monopoly, information problems, and externalities, competitive-fairness purports to achieve an efficient outcome, albeit perhaps gradually. This view also suggests a course of action to regulators and policy makers that leads to greater social efficiency. We next suggest that such fairness is indeed based on moral foundations.
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Consider the dilemma game and its evidence discussed earlier. Such games involve an externality problem where payoffs depend on others' actions. Fairness, however, overcomes this difficulty if moral preconditions require equality of payoffs. We assume that all n players are fair and this is common knowledge. Two candidates satisfy fairness criterion: no contribution and full contribution. In the first case, everyone is left with their endowment, e; in the second case, every one contributes and gets e + ke. Note that in both cases all players receive the same welfare. This coordination problem, involving choice between two fair allocations, is distinct from the zero contribuition prediction of the standard model. Here, players are likely to look for aspects of the game that help them to coordinate their actions, serving as "focal" points. 12 One such item is the specification of the criticad level, c. When c is low, prospects of achieving the full contribution equilibrium are good, because the probability is high that the cooperative venture will succeed. However, when c is high the probability of success is low because a small departure from full contribution, by a very small percentage of players, may lead to failure. Therefore, it can be expected that when c is close to n, no one contributes and the zero-contribution is the most likely outcome. If c is neither very low nor very high, contribution rates are expected to be significant though not 100%. This is the prediction of the competitive-fair model based on the view that players are morally conditioned. 13 The observed contribution rates are about 60%, on average, and conform to these predictions. Also, as expected, the rate of success of the cooperative venture falls as the critical level (c), the suggested focal point, increases. 14 In the multistage games the designs and payoffs seem to violate basic notions of fairness. Recall that players are arbitrarily chosen to take on the role of the allocator and the pie shrinks in successive rounds, giving unjustified rewards to the first player. If moral prerogatives are relevant, players search for equilibria that are moral and also mutually acceptable. Experimental work by Hoffman and Spitzer (1985) suggests that players view simple randomization (of the authority to allocate) to be arbitary and in conflict with their moral conditioning. In their one-stage bargaining model, they find a majority (about 62%) of the allocators, determined by the flip of a coin or by the outcome of a simple game, opted for approximately the equal split. In contrast, such allocators when told that they had "earned the right" (moral authority) behaved more like the "economic man." An interesting result of their study is that given moral authority, allocators determined by winning a game were more aggressive than those that won the toss of a coin. The sequencing of moral authority and superiority at the game somehow legitimized the right to be the allocator. As if moral authority gives one a better claim which is then validated by a win that involves superior effort or talent. Such players felt free to pursue economic gains and were thus more assertive in their behavior.
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In multistage games, therefore, players attempt to converge to a mutually acceptable moral equilibrium. This clearly requires coordination and players are likely to search for focal points in the game. In this regard, the second round pie happens to be an obvious candidate. To be precise, fairness suggests that players will converge to the minimum of the second round pie or the equal-share. Thus, the recipient will receive either approximately the second round pie or 2.50, whichever is less. As mentioned earlier, the results in Nelin et al (1988) confirm this prediction. 15 To consider market fairness and its moral prerequisites, imagine a market that is generally competitive but is confronted with a temporary scarcity. Suppose that the industry is in long run equilibrium and firms earn normal profits. Following a positive shock to demand suppose that output stays fixed. Usually, price rationing scheme is viewed as the most efficient because: (i) the available output is allocated to the most willing, and (ii) the short run market clearing price serves as an appropriate signal in expanding output. A strong case against price rationing can be made if scarcity is temporary and fairness is relevant. The reasons are: (i) Higher price does not serve as signal to increase future production; the higher profit is thus viewed as an end in itself, not as means to an end, (ii) though most willing buyers get the product, this becomes less important if buyers identify themselves as a group distinct from sellers. Because buyers are the primary losers, if fairness is relevant, one asks: why should an unaffected party (the seller) benefit from a mere allocative process? Stated differently, the seller has no moral claim on the additional consumer's surplus generated by the increased demand. 16 In fact, fairness may even imply that a queue dominates a lottery, which in turn dominates price rationing. With respect to the first two, the additional consumer's surplus goes to buyers rather than the seller. A queue has the additional advantage of allocating the product to those who want it most rather than random assignments due to the lottery scheme. FAIRNESS AS CONVENTION An alternative view of fairness is that it is not driven by either moral precedents or by full rationality, it is simply a durable convention. This conception is popularized by Ullman-Margalit (1977), Sugden (1986, 1989), and Young (1993a,b). In fact, its lineage can be traced to Hayek (1960, 1979) where the author argues that beliefs and institutions, including morality, cannot be judged as absolutes. Often taking a game-theoretic approach this literature suggests that some conventions, notably fair division and distributive justice, are stochastically stable and survive alternative conventions. In this view it is noteworthy that stability of convention is the primary reason for the prevalence of fairness. From this perspective, "fairness as convention" is morally and rationally neutral. We next outline the key ideas of this hypothesis.
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Three elements are essential in leading to stable conventions: bounded rationality, interactions among individuals, and random disturbances. Bounded rationality captures the idea that people have rational intentions but are not entirely capable of knowing and figuring out every possible contingency. This may mean that people try to use information from the past to form expectations about an event. However, capacity for information absorption is limited; this is often captured simply by postulating that players in a game sample a fixed number of recent observations, and that old observations disappear. This has the effect of reducing inertia, and allows the evolution to a new convention by overturning old ones. If everyone follows recently observed behavior then an existing convention, say walking on the left side on a narrow walkway, may change in the long run simply because some newcomers started walking on the right side. Interactions, the second element of the convention hypothesis, are relevant because one must form expectations about the behavior of others in order to undertake suitable actions. Walking on the left side, if that is the convention, has to be learned via interactions with others; otherwise, one does not know which to select. When multiple rules or actions--left or right--are possible, conventions help to converge to a unique equilibrium. Because people before have chosen a particular rule and this information is available, it makes sense to follow the same convention. 17 Finally, there are shocks or mutations, the last of the three elements; they provide the impetus for change and evolution. The idea is that people are not fully rational and thus not perfectly predictible, occasionally deviating from the convention. Such disturbances allow realistic abberations in behavior and enable the emergence of new conventions. When some people mistakenly or unknowingly walk on the right, the convention can eventually change to a situation where everyone walks on the right. This also requires that people sample only recent observations and choose to follow the new action. In the natural world, the driving force of evolutionary change is mutation: mutations that are favored by natural selection thrive, outlive others, and establish significant changes. In the convention literature the analogue of natural selection is bounded rationality. Occasional deviant behavior may be reinforced by boundedly rational people because they feel that such actions are in their best interest, given limited information. It may be noted that mutations deriving from unpredictible behavior is also a manifestation of bounded rationality. Thus, bounded rationality is doubly significant in this literature. When the probability of mutation is positive but low, it turns out that conventions are highly stable. However, there is always some positive probability that conventions can change once mutations are allowed. In this framework it is possible that isolated societies with identical conditions may experience different conventions and thus different morality and fairness. Such path-dependent outcomes, however, are not permanent and do not exhibit historical lock-in. Young
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(1993a), Kandori, Mailath and Rob (1993) show that people within a population will mostly use the same convention if the probability of mutation is low, information is sufficiently incomplete, and all people have positive probability of interacting. When several populations or say isolated groups are considered that are similar in every way except that they do not interact with each other, the process may lead to different convention being used in different groups. What is particularly intersting is the notion that the equal-share rule itself may be a highly stable convention. Young (1993b) shows that of three possible outcomes of division between a landlord and a tenant in a sharecropping arrangement--75:25, 50:50, and 25:75--the 50:50 rule is the unique stochastically stable convention. This requires fairly reasonable assumptions: similarity of tastes and preferences and limited but identical information among landlord and tenants. Proponents of the fairness-as-convention view argue, at this juncture, that the equal-share principle persists because it is dynamically stable. RECIPROCITY AND FAIRNESS The idea that reciprocal behavior leads to fairness and cooperation is a well received notion in the economics literature. Opportunities for reciprocal behavior often allow repeated interactions among players and create an enforcement mechanism. This literature is closest to economists' views of self-interested behavior: players behave fairly and cooperate because it is in their best interest to do so; such behavior maximizes long run profits. What is particularly interesting is that in some situations there may be reciprocity and mutual concerns even in one-time transactions. Conceptually, this transcends fairness induced by the prospect of repeated play. We next turn to such inspirations. Fairness is often motivated by psychological beliefs about others' intentions. Examples are: tipping a waiter because he cares about my utility, rewarding an exceptionally loyal worker even when it is not in the manager's self-interest, not exploiting the full consumers' surplus even when possible because the consumer may be upset. Rabin (1993) proposes a model of fairness based on such themes-people favor those who care for them and hurt those who have ill feelings; often the same people who reciprocate favors may hurt others in retaliation for their hurtful sentiments. To model such behavior, Rabin develops a game-theoretic framework where beliefs about other player matter. Such psychological games have the advantage of predicting how a player acts when she is confronted with fair or malicious intentions of the other player. Consider the case of monopoly pricing. It has often been argued that a monopolist concerned about fairness will set its price below the conventional monopoly price. Khaneman et al (1986) argues that fairness is a realistic constraint on profitmaximizing behavior and causes firms to set prices differently from the prediction of the conventional model. Rabin's model allows an examination of this intuition.
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Using this framework, the author shows that when the monopolist takes into account the demands of the consumer for fair price, the highest price consistent with fairness is strictly less than the value of the product to the consumer. In this situation the highest price is less than the conventional monopoly price. Also, the author shows that the higher the monopolist's costs, the greater the equilibrium fair price that the consumer is willing to pay; an idea that conforms to the surveys in Khaneman et al (1986). Another interesting example is in the area of labor economics; consider giftexchange equilibrium discussed by Akerlof (1982). Imagine a situation where effort is costly to the worker but essential in producing output. Also, suppose that benefits are costly to the firm but valued by the worker. It is possible to construct examples where the dominant strategy for the worker and the firm involve least effort and least benefit. This would be the conventional "unkind" equilibrium. Once fairness concerns are added, however, the outcome changes. Rabin shows that the introduction of mutual fairness concerns lead to better effort and better benefits. The key to this improvement is that the two parties reciprocate favors on the basis of beliefs: worker offers higher effort in anticipation of better benefits, and firm offers better benefits in anticipation of higher effort. In equilibrium better effort and benefits are delivered and beliefs are validated. Finally, it may be noted that the conclusions of this literature suggest that fairness concerns have greater impact on equilibrium behavior when individual sacrifices are small. In other words, people forgo some of their own benefits to reward those who are helpful and penalize others who are hurtful, mostly when their own costs are small. If the stakes are large, either in helping or in hurting, then individuals tend to be less reciprocating, as if they succumb to the larger motivations of personal welfare. This result is often viewed as a weakness. However, it may be noted that in decentralized markets small concerns for fairness may have significant cumulative effects. If fairness is common knowledge and it is reciprocated by similar behavior, then the resulting fairness equilibrium may be significantly different from standard predictions.
CONCLUDING REMARKS Concerns for fairness seem to be quite prevalent. Three broad motivations of fairness are discussed in the paper: moral prerequisites, stable convention, and reciprocity. While the first source derives from morality, the second motivation of fairness is morally neutral. Reciprocity is mostly driven by psychological beliefs and is closer to the model of self-interest; it is also partly moral because players feel obligated to reciprocate, sacrificing some of their personal gains. Also, competitive-fair behavior is not devoid of self-interest impetus; once the moral underpinnings have been satisfied, players seem to be free to pursue economic gains.
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Despite the diversity of ideas, their origins, and frameworks, these conceptions o f f a i r n e s s a r e n o t m u t u a l l y e x c l u s i v e a n d n o t c o n t r a d i c t o r y . It is e n t i r e l y p o s s i b l e that f a i r n e s s is m o r a l l y m o t i v a t e d a n d is o f t e n p e r p e t u a t e d b y p s y c h o l o g i c a l e x p e c t a t i o n s , p r o v i d i n g it t h e status o f a c o n v e n t i o n . W i t h i n t h e c o m p e t i t i v e - f a i r h y p o t h e s i s , s e l f - i n t e r e s t e d b e h a v i o r p l a y s a p r o m i n e n t r o l e o n c e t h e c o n v e n t i o n is e n t r e n c h e d a n d m o r a l f o u n d a t i o n s a r e m e t . T h e e v o l u t i o n a r y v i e w is a l s o u s e f u l e s p e c i a l l y in the l o n g run; it s u g g e s t s the d y n a m i c s o f c h a n g e that l e a d to e v l o v i n g m o r a l s t a n d a r d s a n d p s y c h o l o g i c a l b e l i e f s in t h e p u r s u i t o f f a i r b e h a v i o r .
Acknowledgments: I thank Richard Hattwick, Bernie Herber, Jack Hirshleifer, Betsey Hoffman, Mark Isaac, Stan Reynolds, Amartya Sen, Gordon Tullock, Oliver Williamson, and Edward Zajac for helpful comments on earlier drafts. The usual disclaimer applies.
NOTES 1.
2. 3.
4. 5.
6.
7.
8.
The view that man is selfish is often attributed to Adam Smith. In fact, Smith had hoped to complete the grand synthesis with the "general principles of law and government and of the different revolutions they had undergone in the different ages and periods of society." This appears in the concluding paragraph (in the last few editions) and in the advertisements of the sixth edition (1790) of Moral Sentiments, also the year of Smith's death. Smith is not a proponent of selfish behavior; this also becomes more clear when Theory of Moral Sentiment (1759) and Wealth of Nations (1776) are considered as parts of a greater whole. Sen also holds that Smith was not referring to pure selfishness as the main motive of human behavior; see Klamer (1989). Also, see Campbell (1971). Fairness concerns are also widespread in the regulatory environment; see Zajac (1985). Philosophers, notably Rawls (1971) and Gauthier (1986) attempt to show that morality can be rational. For Rawls it is more of an assumption that the theory of justice is moral. This is achieved by invoking the "veil of ignorance." In Gauthier it is part of the contractarian enterprise. This, however, raises the question whether issues like morality, justice, and fairness are to be explained within a rational framework or simply taken as norms that people follow. For additional discussions on these issue, see Sugden (1986, 1993). It should be understood that this paper is simply an attempt to capture some prevailing notions of fairness, not defending a pattern of distributive justice. Also, Akerlof and Yellen (1990) argue that fair-wage is important for productivity. In the absence of fair behavior, product quality or work effort may suffer, resulting in suboptimal profits. In a more general context Axelrod's reciprocal altruism (1984) suggests that players use tit-for-tat strategy to retaliate against deviant behavior. However, as mentioned earlier, the analysis does not include a detailed discussion of fairness that results from coordination made possible via the existence of long term enforcement mechanisms. The reason for this choice is that such notions of fairness are well understood; also, they are almost indistinguishible from self-interested behavior. Simplicity is essential since fairness may require that each agent knows the endowments and payoffs of all other agents. Roth and Malouf (1979) examine experimental evidence when information is incomplete. Also, simplicity translates to less complex calculations for subjects. Dawes, Orbell, Simmons, & van de Kragt (1986) report another set of experiments where they find lower contribution rates. They required subjects to reveal their own probability estimates for three possible situations: failure, exact success, and beyond success. This experimental
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10.
I1. 12. 13.
14.
15. 16. 17.
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exercise, in our opinion, suggests to the subjects the model that the authors want to test. Because of this possible problem, we do not summarize those results. A clear answer must wait further experimental work. However, a careful look at the distribution of offers in Neelin et al. (1988) suggest that this would be very unlikely. Note that a very significant number offered slightly more than the second round pie to their opponents in the two round (18 out of 40) and five round (15 out of 40) games. In the three round game, however, only a small number (4 out of 40) offered anything greater than the second round pie of 2.50. In a market situation, concerns for fairness may be quite pervasive. However, market interactions are impersonal compared to games discussed earlier. Therefore, the strain between fairness and self-interest is less conspicuous. Perhaps because of this subdued conflict, there is little in the way of direct empirical evidence. Akerlof (1970), Arrow (1973, 1975) suggest the importance of trusted relationships; some markets may function poorly because of the lemons problem. See Schelling (1960). Cooperation could also succeed because of reciprocal altruism (Axelrod, 1984) or the perception that one's opponent is irrational (Kreps, Milgrom, Roberts, & Wilson, 1982). While these theories explain cooperation in repeated games, their arguments actually suggest that there should be no cooperation in one-shot games. Most experiments relating to dilemma situations cannot be used to support or contradict the fairness principles. Such studies examine subject and group behavior in more complex games involving: any amount between 0 and e, absence of a critical number of persons or dollars required (often called provision point), inadequate information, and dynamic games. We feel that one-shot games with full-information are ideal candidates that manifest clearly the concerns for fairness postulated in this paper. For additional experimental evidence see Isaac and Walker (1988). Myopia requires that the second round pie is chosen, this is different from fairness. The perception would be different, however, if sellers' actions led to a different consumer's surplus, like better warranties generating increased demand. This of course assumes that everyone choosing the same equilibrium does not lead to congestion. Note that in the absence of interactions, conventions are not particularly useful because there is nothing to coordinate and thus nothing to learn.
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