Choices in an Interdependent Economic Environment: Inequity Averson and Bargaining Games

Experimental economics has revealed an underlying tension between preferences for fairness and the purely self-interested behavior assumed throughout economic theory. Though many models attempt to explain observed behavior that is inconsistent with theory, the motivations behind such deviations from theoretic equilibrium are still largely unknown. This paper investigates preferences for fairness in a controlled laboratory setting using an ultimatum game variant. Payoffs to participants are altered over several treatments to examine if subjects exhibit behavior that is consistent with a preference model which incorporates envy and guilt into an individual’s utility function. The results indicate evidence of both guilt and envy in participant behavior, and shed further light on the tension between fairness preferences and self-interest in the ultimatum bargaining game