A Digital Library for Microeconomics Education

Copyright © 2006 Experimental Economics Center, Georgia State University. All rights reserved.

Introduction to Trust, Fairness, Reciprocity and Other-Regarding Preferences

Economists typically assume that someone makes a decision by considering only how the decision's outcome will affect his own material payoff. These types of preferences are called self-regarding, because the person behaves without regard to how his decision might affect anybody else. While the assumption of selfish behavior works well for studying some forms of economic decisions, this approach ignores how issues such as fairness and kindness influence someone's decisions. When someone makes decisions that are not solely motivated by self-regarding preferences, her behavior is said to be other-regarding.

Some examples of other-regarding behavior include:

  • Donating to charity
  • Opening a door for someone who is carrying a heavy item
  • Yielding to somebody who is trying to merge into rush hour traffic
  • An eBay seller providing positive feedback on a buyer after the buyer provides positive feedback on the seller
  • Repaying a favor

The majority of economic and game-theoretical models are based on the assumption that agents have self-regarding preferences. These models seem to describe the behavior of agents quite accurately in many situations. However, one can point to many experimental settings in which subjects do not behave consistently with this assumption. Their behavior implies that many of them are concerned with the notion of fairness.

It has been observed in many types of controlled experiments that the behavior of agents is not always consistent with the rational model of ''economic man.'' Non-cooperative game theory and self-regarding preferences are often a convenient way of describing and predicting behavior in strategic interactions. This structure performs well in many situations characterized by a strong competition among agents. However, if a notion of fairness or opportunity for cooperation enters the decision-making process, the observed outcomes often deviate from the self-regarding preference model's predictions because the utilities of players are no longer affine transformations of monetary payoffs. Reported results of positive contributions in various public goods experiments or equal splits in bargaining games do not invalidate game theory, but rather suggest that an alternative model of utility is needed in certain environments.

The existing literature on fairness deals with alternatives to the economic man model of self-regarding preferences. In this literature the other-regarding behavior may depend on the motives underlying the actions taken by others, and might be referred to as fair behavior, reciprocity, altruism or choices generated by various types of other-regarding preferences.

Other-regarding behavior can usually be found in environments characterized by salient fairness considerations. For experimental examples of such environments, see the experiments section.

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