Distributional Preferences, Reciprocity-Like Behavior, and Efficiency in Bilateral Exchange

Under what conditions do distributional preferences, such as altruism or a concern for fair outcomes, generate efficient trade? I analyze theoretically a simple bilateral exchange game: each player sequentially takes an action that reduces his own material payoff but increases the other player’s. Each player’s preferences may depend on both his/her own material payoff and the other player’s. I identify two key properties of the second-mover’s preferences: indifference curves kinked around “fair ” material-payoff distributions, and materials payoffs entering preferences as “normal goods. ” Either property can drive reciprocity-like behavior and generate a Pareto efficient outcome