A Theory of Fairness, Competition, and Cooperation

TLDR

Evidence shows that people exploit bargaining power in competitive markets but not in bilateral bargaining, exploit free‑riding in voluntary cooperation, and maintain cooperation through costly punishment. The paper seeks a simple common principle that explains these seemingly contradictory behaviors. The authors find that equity concerns resolve the puzzles, with the economic environment determining whether fair or selfish types dominate equilibrium behavior.

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 some people care about equity the puzzles can be resolved. It turns out that the economic environment determines whether the fair types or the selfish types dominate equilibrium behavior.