The Economics of Fairness, Reciprocity and Altruism - Experimental Evidence and New Theories

Most economic models are based on the self-interest hypothesis that assumes that material self-interest exclusively motivates all people. Experimental economists have gathered overwhelming evidence in recent years, however, that systematically refutes the self-interest hypothesis, suggesting that concerns for altruism, fairness, and reciprocity strongly motivate many people. Moreover, several theoretical papers demonstrate that the observed phenomena can be explained in a rigorous and tractable manner. These theories then induced a first wave of experimental research which offered exciting insights into both the nature of preferences and the relative performance of competing fairness theories. The purpose of this chapter is to review these developments, to point out open questions, and to suggest avenues for future research. We also discuss recent neuroeconomic evidence that is consistent with the view that many people have a taste for mutual cooperation and the punishment of norm violators. We further illustrate the powerful impact of fairness concerns on cooperation, competition, incentives, and contract design.