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We demonstrate that a simple model, constructed on the premise that people are motivated by both their pecuniary payoff and their relative payoff standing, explains behavior in a wide variety of laboratory games. Included are games where equity is thought to be a factor, such as ultimatum, two-period alternating offer, and dictator games; games where reciprocity is thought to play a role, such as the prisoner’s dilemma and the gift exchange game; and games where competitive behavior is observed, such as Bertrand and Cournot markets, and the guessing game.

Departures from self-interest in economic experiments have recently inspired models of “social preferences”. We design a range of simple experimental games that test these theories more directly than existing experiments. Our experiments show that subjects are more concerned with increasing social welfare—sacrificing to increase the payoffs for all recipients, especially lowpayoff recipients—than with reducing differences in payoffs (as supposed in recent models). Subjects are also motivated by reciprocity: They withdraw willingness to sacrifice to achieve a fair outcome when others are themselves unwilling to sacrifice, and sometimes punish unfair behavior.

Abstract: Many experimental studies indicate that people are motivated by reciprocity. Rabin (1993) develops techniques for incorporating such concerns into game theory and economics. His model, however, does not fare well when applied to situations with an interesting dynamic structure (like many experimental games), because it is developed for normal form games in which information about the sequential structure of a strategic situation is suppressed. In this paper we develop a theory of reciprocity for extensive games in which the sequential structure of a strategic situation is made explicit. We propose a new solution concept— sequential reciprocity equilibrium—which is applicable to extensive games, and we prove a general equilibrium existence result. The model is applied in several examples, including some well known experimental games like the Ultimatum game and the Sequential Prisoners’ Dilemma.

Most economic models are based on the self-interest hypothesis that assumes that all people are exclusively motivated by their material self-interest. In recent years experimental economists have gathered overwhelming evidence that systematically refutes the self-interest hypothesis and suggests that many people are strongly motivated by concerns for fairness and reciprocity. Moreover, several theoretical papers have been written showing that the observed phenomena can be explained in a rigorous and tractable manner. These theories in turn induced a new wave of experimental research offering additional exciting insights into the nature of preferences and into the relative performance of competing theories of fairness. The purpose of this paper is to review these recent developments, to

Departures from pure self interest in economic experiments have recently inspired models of "social preferences". We conduct experiments on simple two-person and three-person games with binary choices that test these theories more directly than the array of games conventionally considered. Our experiments show strong support for the prevalence of "quasi-maximin" preferences: People sacrifice to increase the payoffs for all recipients, but especially for the lowest-payoff recipients. People are also motivated by reciprocity: While people are reluctant to sacrifice to reciprocate good or bad behavior beyond what they would sacrifice for neutral parties, they withdraw willingness to sacrifice to achieve a fair outcome when others are themselves unwilling to sacrifice. Some participants are averse to getting different payoffs than others, but based on our experiments and reinterpretation of previous experiments we argue that behavior that has been presented as "difference aversion" in re...

This paper uses a three-games (or triadic) design to identify trusting and reciprocating behavior. A large literature on single-game trust and reciprocity experiments is based on the implicit assumption that subjects do not have altruistic or inequality-averse other-regarding preferences. Such experimental designs test compound hypotheses that include the hypothesis that other-regarding preferences do not affect behavior. In contrast, experiments with the triadic design do discriminate between transfers resulting from trust or reciprocity and transfers resulting from other-regarding preferences that are not conditional on the behavior of others. Decomposing trust from altruism and reciprocity from altruism or inequality aversion is critical to obtaining empirical information that can guide the process of constructing models that can increase the empirical validity of game theory.

We introduce a parametric model of other-regarding preferences. The income distribution, other status considerations, and the kindness or unldndness of others' choices ("intentions") systematically affect a person's emotional state. The emotional state then determines the marginal rate of substitution between own and others' payoffs, and thus the person's subsequent choices.

In two-stage bargaining games with alternating offers, the amount of the pie that remains after a rejection is what the first player should offer to the second player, since the second player can capture this remainder in the final (ultimatum) stage. Fairness considerations will reduce the correlation between first-stage offers and the size of the remaining pie, but randomness in behavior will have the same "flattening " effect. This paper reports an experiment designed to separate these considerations, by introducing asymmetric fixed money payments to each player. These endowments do not affect the perfect positive correlation between initial Nash offers and the remaining pie, but are selected to induce a perfectly negative relationship between the remaining pie size and the first-stage offer that would equalize final earnings of the two players. This negative relationship is apparent in the data, which suggests the importance of fairness considerations. A theoretical model of asymmetric inequality aversion and stochastic choice is used to provide maximum likelihood estimates of utility and logit error parameters. The parameters representing "envy, " "guilt, " and logit errors are all significant, and the resulting model produces the observed negative relationship between initial offers and residual pie size. 1.

This paper introduces a triadic game structure for conducting trust and reciprocity experiments. A large literature on single-game trust and reciprocity experiments is based on the assumption that subjects utility payoffs are the same as their own monetary payoffs in the experiments. Such designs test compound hypotheses that include the hypothesis that otherregarding preferences do not affect behavior. In contrast, the experiments with game triads do discriminate between transfers resulting from trust or reciprocity and transfers resulting from other-regarding preferences. Alternative treatments vary the environment of the experiments from a weak to a strong social context. The observations in two social contexts of decisions motivated by other-regarding preferences, trust, and/or reciprocity are central to obtaining empirical information that can guide the process of formulating a theory of utility that can increase the empirical validity of game theory. Data from experiments with the triadic design are used to evaluate recent extensions of theory that incorporate concern for fairness of monetary payoffs and perceptions of others intentions into agents utilities. Keywords: experimental economics, game theory, trust, reciprocity, altruism JEL Classification: C70, C91, D63, D64 1 Trust and Reciprocity: Implications of Game Triads and Social Contexts* 1.