Fear usually appears in situations when a negatively preceived action of an agent could possibly trigger retaliatory behavior of the other party that was affected by the original decision. If an agent has a strong belief that his counterpart would respond in a negatively reciprocal way, he might refrain from taking that action and chose a one that is acceptable by the other party instead. The fear of punishment may in some situations prevent defection or free-riding and bring mutual benefits to participants engaging in cooperative endeavors, such as an investment or a provision of a public good. Fear should not be confused with the absence of trust.
Examples of Fear
- An illegal moonlighter who has an access to a homeowner's money in order to buy materials might be afraid to take the money and disappear because the homeowner could still go to court even though it would have negative consequences for both since the whole activity was forbidden by the law.
- Decision of workers of not going on a strike because of fear of loosing a job.
- Decision to be faithful to a spouse only because of fear of divorce if being caught cheating.
- A consumer being afraid to buy a product sold by a new seller with zero feedback on eBay is an example of lack of trust not fear.
Fear in an Experimental Setting
In the experimental literature the notion of fear emerged in Güth,Schmittberger, and Schwarze's  paper exploring the ultimatum bargaining game. In the ultimatum game the proposer first decides on a split of a fixed amount of money between himself and a recipient. Then the recipient can either accept the proposed split or reject it. If he/she accepts, the sum is divided according to the proposer. If he/she rejects, both players get 0. Even though the proposer might prefer to keep the whole sum, he may offer a significant amount to the recipient because of a fear of rejection leading to a zero payoff.
Another case where the concept of fear of negative reciprocity appears is the moonlighting game. The fear is defined as follows. "Agent 1 undertakes an action that exhibits fear of negative reciprocity if, in two otherwise identical environments, he: ( a ) foregoes an opportunity to take money from agent 2 when agent 2 has an opportunity to retaliate; and ( b ) takes money from agent 2 when agent 2 does not have an opportunity to retaliate." [Cox, Sadiraj, and Sadiraj, 2002.]
Note that the above definition of observable fear incorporates a possible dependence of the inferred preferences over outcomes on the process that generates those outcomes and attributions of the intentions of others. The triadic experimental design described in the sections on the moonlighting game and dictator game makes it possible to discriminate between the implications of other-regarding preferences and trust, fear, or reciprocity. A more detailed discussion is included in Advanced Discussion on Separating Various Motives of Behavior in the Moonlighting Game subsection.
More examples of fear in an experimental setting can be found in the following games:
- Abbink, Klaus, Bernd Irlenbusch, and Elke Renner, "The Moonlighting Game: An Empirical Study on Reciprocity and Retribution." Journal of Economic Behavior and Organization, 42, 2000, pp.265-77.
- Cox, James C. and Cary Deck, "On the Nature of Reciprocal Motives," Economic Inquiry, forthcoming.
- Cox, James C., Klarita Sadiraj, and Vjollca Sadiraj, "Implications of Trust, Fear, and Reciprocity for Modeling Economic Behavior," University of Arizona discussion paper, 2004.
- Falk, Armin, Ernst Fehr, and Urs Fischbacher, "On the Nature of Fair Behavior," Economic Inquiry, forthcoming.
- Güth, Werner, Rolf Schmittberger, and Bernd Schwarze, "An Experimental Analysis of Ultimatum Bargaining," Journal of Economic Behavior and Organization, December 1982, 3, pp. 367-388.