A Tractable Model of Reciprocity and Fairness

Abstract

We introduce a parametric model of other-regarding preferences. The income distribution and the kindness or unkindness of others' choices ('intentions') systematically affect a person's emotional state. The emotional state systematically affects the marginal rate of substitution between own and others' payoffs, and thus the person's subsequent choices. The model is applied to two sets of laboratory data: simple binary choice mini-ultimatum games, and Stackelberg duopoly games with a range of choices. The results confirm that other-regarding preferences respond to others' intentions as well as to the income distribution.