EconPort - Fairness

One might think of fairness as something that has to do with non-selfishness. Whereas selfish economic agents are concerned with maximizing own payoffs and do not care about the others well-being, the non-selfish agents put some weight in their decisions on how the rest of the involved people will feel about the choices they make. Different cultures and societies perceive fairness in various ways, what might be common in one society could very easily be unacceptable somewhere else. So fairness is clearly related to social norms of behavior. Consider again a driving example. In Italy another driver will yield the right of way to you because you are ahead of him by a bumper so you can change lanes without any further consequences. If you try to do the same thing in the U.S., people will get mad that you cut in front of them, therefore you may not do it. Thus, not doing something that is socially unacceptable can also be because of other-regarding preferences.

Fairness is a difficult term to define precisely although it is used often in everyday life. In the context of bargaining games one might suggest that the desired property of fairness is symmetry. This could be the case when both parties are non-satiated in money and have identical preferences. However, if consumers have heterogeneous tastes and deal with allocation of goods, further gains can be acquired from exchange. Fehr et al. [1993, pp. 441] conclude that "...[fairness] necessarily involves some comparison between the gains of transactors. Therefore, if an agent is motivated by fairness considerations, his actions are based not only on his own gains, but also on the gains of other parties."

Preferences that involve notion of fairness of outcomes are referred to as other-regarding preferences. Cox, Sadiraj K., and Sadiraj V. [2002, pp. 3] define other-regarding preferences as "preferences over the absolute and relative amount of another individual's money payoff, in addition to one's own money payoff." Other-regarding preferences might or might not depend on the previous action(s) taken by the other party. If one's behavior affects the other agent's preferences, and thus also choices, then such preferences may include a concept of either positive or negative reciprocity and are conditional on the actions taken by the other person. However, there also exist other-regarding preferences, such as altruistic, inequality-averse preferences etc., when agents choices are not a consequence of what decision the other party made, i.e. are unconditional on behavior of others.

Examples of Fairness in Experimental Settings

Examples of fairness in an experimental setting can be found in the following games: