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Distributional Preferences, Reciprocity-Like Behavior, and Efficiency in Bilateral Exchange

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Under what conditions do distributional preferences, such as altruism or a concern for fair outcomes, generate efficient trade? I analyze theoretically a simple bilateral exchange game: each player sequentially takes an action that reduces his own material payoff but increases the other player’s. Each player’s preferences may depend on both his/her own material payoff and the other player’s. I identify two key properties of the second-mover’s preferences: indifference curves kinked around “fair” material-payoff distributions, and materials payoffs entering preferences as “normal goods.” Either property can drive reciprocity-like behavior and generate a Pareto efficient outcome.

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2013-08-31

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distributional preferences; fairness; altruism; gift exchange; rotten kid theorem

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https://hdl.handle.net/1813/73188

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Government Document

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Required Publisher Statement: © American Economic Association. Reprinted with permission. All rights reserved.

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preprint

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