A theory of reciprocity

A theory of reciprocity
Armin Falka, and Urs Fischbacherb, , aInstitute for the Study of Labor and University of Bonn, IZA, PO Box 7240, D-53072 Bonn, GermanybInstitute for Empirical Research in Economics, University of Zurich, Blümlisalpstrasse 10, CH-8006 Zürich, Switzerland Received 6 February 2003. Available online 26 April 2005.

Abstract
People are reciprocal if they reward kind actions and punish unkind ones. In this paper we present a formal theory of reciprocity. It takes into account that people evaluate the kindness of an action not only by its consequences but also by its underlying intention. The theory is in line with the relevant stylized facts of a wide range of experimental games, such as the ultimatum game, the gift-exchange game, a reduced best-shot game, the dictator game, the prisoner's dilemma, and public goods games. Furthermore, it predicts that identical consequences trigger different reciprocal responses in different environments. Finally, the theory explains why outcomes tend to be fair in bilateral interactions whereas extremely unfair distributions may arise in competitive markets.
Keywords: Reciprocity; Fairness; Cooperation; Competition; Game theory
JEL classification: C7; C91; C92; D64; H41