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Articles - Fehr and schmidt: a theory of fairness

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Most economic models assume that all people are exclusively pursuing their material self-interest and do not care about social goals. However, there is evidence that this is not always true. There is a large variety of evidence suggesting that many people are driven by

fairness considerations, other pieces indicate instead that almost all people behave completely selfish and others suggest that cooperation motives are crucial. If assumed that there is always a fraction of people who are motivated by fairness consideration, this wide variety can be explained by a single simple model.

The model constructs fairness as self-centered inequity aversion. Inequity aversion means that

people resist inequitable outcomes, meaning they are willing to give up some material payoff to move in the direction of more equitable outcomes.

According to Rabin an action is perceived as fair if

the intention that is behind the action is kind, and as unfair if the intention is hostile. The kindness or hostility again depends on the equitability of the payoff distribution induced by the action. So, both Rabin’s model and Fehr’s model are based on the notion of an equitable outcome.

Difference between Rabin’s model and Fehr’s model is that

Rabin models the role of intention explicitly. The disadvantage of that is that it requires the adoption of psychological game theory that is more difficult to apply than standard game theory, meaning that Rabin’s model can only be used in two-person normal form games.

There is evidence that people exhibit strong and robust aversion against disadvantageous inequality but, to a lesser extent, people also exhibit an aversion to advantageous inequality. This is also modeled in Fehr’s model. Other assumptions made in his model are the following:

1) Players suffer more from inequality that is to his disadvantage.
2) The existence of subjects who like to be better off than others is ruled out.

Disutility from inequality is self-centered in the sense that an individual player compares himself with each of the other players but does not care about inequalities within the group of his opponents.

The question on the page originate from the summary of the following study material:

Games and Information An Introduction to Game Theory | 9781405136662 | Eric Rasmusen

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