A Theory of Fairness, Competition and Cooperation

TLDR

People exploit bargaining power in competitive markets but not in bilateral bargaining, exploit free‑riding in voluntary cooperation, yet punishment can sustain cooperation despite its cost. The study seeks a simple common principle explaining these contrasting behaviors. The authors find that a minority of inequality‑averse individuals can resolve the observed puzzles.

Abstract

There is strong evidence that people exploit their bargaining power in competitive markets but not in bilateral bargaining situations. There is also strong evidence that people exploit free-riding opportunities in voluntary cooperation games. Yet, when they are given the opportunity to punish free riders, stable cooperation is maintained although punishment is costly for those who punish. This paper asks whether there is a simple common principle that can explain this puzzling evidence. We show that if a fraction of the people exhibits inequality aversion the puzzles can be resolved.