Homo reciprocans : A Research Initiative on the Origins, Dimensions, and Policy Implications of Recipro cal Fairness Samuel Bowles Rob ert Boyd Ernst Fehr Herb ert Gintis June 7, 1997 Abstract Exp erimental economists and other so cial scientists have discovered an imp ortant form of human b ehavior that has b een inadequately an- alyzed by b ehavioral scientists. In public go o ds, ultimatum, and other games where players gain from co op erative b ehavior, agents have a predisp osition to co op erate and to undertake costly punishmentofde- fectors, even when this b ehavior cannot b e justi ed in terms of tradi- tional game-theoretic equilibrium and learning concepts. We call this `recipro cal fairness.' Our research has four goals. First, can the exp eriments on recipro- cal fairness b e replicated with diverse sub ject p o ols and various strate- gic settings? Second, how might such b ehavior have evolved, given that it is formally altruistic, and hence `un t' except under stringent circumstances? Third, how do es the existence of recipro cal fairness in- uence our analysis of so cial p olicy in such areas as taxation, charity, redistributive exp enditure, and criminal sentencing? Fourth, how to what extent do es cultural variation induce di erences in the strength of recipro cal b ehavior and conditions under which agents exhibit re- cipro cal fairness? 1 Explaining Co op erative Behavior Despite its reputation for fostering comp etitive b ehavior, the contemp orary market economy sustains imp ortant forms of co op eration. Employees co op- erate with one another and with management in the enterprise, agents are more or less trustworthy in exchange situations, family memb ers provide for one another, p eople givetocharity,volunteer for public service, and supp ort government redistributive exp enditures. 1 Research Initiative on Recipro cal Fairness June 7, 1997 As Bernard de Mandeville (\The Fable of the Bees") and Adam Smith (\The Invisible Hand") long ago observed, the prop er institutional frame- work can induce self-interested agents to serve the interest of others. The most sophisticated mo dern statement of this principle is probably the Funda- mental Theorem of Welfare Economics, based on the Walras-Arrow-Debreu 1 general equilibrium mo del. This `neo classical' explanation of co op eration presumes that all economic transactions are fully contractible, and all contracts are costlessly enforce- able. However co op eration in mo dern market economies is not limited to situations of complete and costlessly enforced contracts. When the assump- tions of the general equilibrium mo del are appropriately weakened a di er- ent set of analytical to ols are needed to explain why self-interested agents co op erate. One such to ol is the rep eated game, which implies the famous `Folk The- orem,' implying that when discount rates are suciently low, Pareto-optimal co op eration can be sustained if each agent resp onds to a non-co op erative action by refusing to co op erate for the remainder of the game. Under suit- able conditions such threats can b e shown to b e credible, in the sense that it will indeed be in the self-interest of each agent to carry out the threat of retaliatory defection should the o ccasion to do so arise, given that every 2 other individual do es so as well. While few instances of so cial co op era- tion actually use universal defection to sustain co op eration, other plausible 3 sanctions can serve the job as well. The principal-agent mo del and its manyvariations have also b een used widely to explain co op eration in the rm, and have b een extended to provide an analytical basis for a theory of economic institutions based on treating 4 individuals as rational and self-interested. However imp ortant forms of co op erative b ehavior are commonly ob- 1 See, for instance, Debreu (1959), Arrow and Debreu (1954), Arrow and Hahn (1971), or Mas-Colell (1985). 2 See Thompson and Faith (1981) and Fudenb erg and Maskin (1986). For a more general treatment of the Folk Theorem and its variants, see Kreps (1990) or Fudenb erg and Tirole (1991). 3 For instance, a group of p otential co op erators can o er incentives for individuals to monitor and punish defection (Weissing and Ostrom 1991, Bendor and Mo okherjee 1987), or can ostracize defectors (Cremer 1986, Hirshleifer and Rasmusen 1989, Gintis 1989, Boyd and Richerson 1992). In addition, co op erators can di erentially asso ciate with other co op erators (Bo orman and Levitt 1980, Grafen 1979, Hamilton 1963, Wilson 1980, Trivers 1971, Bergstrom and Stark 1993, Bergstrom 1995). 4 See Shapiro and Stiglitz (1984), Bowles (1985), Holmstrom (1979), Holmstrom (1982), Bowles and Gintis (1993), Holmstrom and Milgrom (1994), Grossman and Hart (1983, 1986) and Hart and Mo ore (1990). 2 Research Initiative on Recipro cal Fairness June 7, 1997 served, and consistently repro duced in the lab oratory, that are dicult to explain by mo deling economic agents as self-interested actors in the tra- dition of the rational actor mo del. One is that p eople are `irrationally' pro-so cial: in lab oratory settings sub jects consistently app ear to contribute more than the rational actor mo del predicts in public go o ds games (Marwell and Ames 1979, Schneider and Pommerehne 1981, Dawes, de Kragt and Or- b ell 1988, Isaac and Walker 1988b, Isaac and Walker 1988a). For a review of the extensive literature on this sub ject, see Ledyard (1995). We may summarize this research as follows. Only a fraction of sub jects consistently defect, contributing nothing to the public account. Rather, p eople b egin by making contributions that average ab out midwaybetween the p erfectly co op erative and the p erfectly nonco op erative levels, although co op eration deteriorates if the game is rep eated numerous times. There have b een some attempts to explain pro-so cial public go o d contri- bution on the basis of the rational actor mo del, most notably Jo el Guttman (1986, 1987). The mo dels we have seen, however, require implausible com- mitment assumptions, and do not explain the lab oratory evidence on the public go o ds game. Others have attempted to reconcile this b ehavior with `rationality' by noting that in rep eated public go o ds games, co op eration de- cays over time, eventually approximating the unique subgame p erfect equi- librium. This suggests that participants do not understand the game at rst, but progressively learn the sup eriority of the free-riding strategy. There is p ersuasive evidence that interpretation is incorrect, however. For instance, Andreoni (1988) and Fehr and Tyran (1996) nd that when such games are rep eated with the same sub jects, the initial levels of co op era- tion are restored, but once again co op eration decays as the game progresses. These authors suggest that the decay of co op eration in rep eated public goods games o ccurs b ecause public-spirited contributors retaliate against free-riders in the only way available to them in the game: by defecting themselves. Indeed, retaliation is a second form of anomalous b ehavior consistently found in lab oratory studies: that p eople app ear to be `irrationally' vin- dictive. For instance, resp onders in ultimatum games reject p ositive o ers apparently to imp ose costs on `unfair' prop osers (Forsythe, Horowitz, Savin and Sefton 1994, Ho man, McCab e and Smith April, 1996, Cameron 1995, Abbink, Bolton, Sadrieh and Tang 1996, Eckel and Grossman 1996a, Eckel 5 and Grossman 1996b, Eckel and Grossman 1997). Some have explained this anomaly simply as error on the part of re- 5 For an overview, see Davis and Holt (1993) and Fehr and Tyran (1996). 3 Research Initiative on Recipro cal Fairness June 7, 1997 sp onders. The most sophisticated explanation of this typ e is p erhaps Gale, Binmore and Samuelson (1995), who make the dynamic argument that the error rates of resp onders are likely to b e high and negatively correlated with the size of the o er in a rep eated ultimatum game. We nd this explanation implausible, however, since human sub jects are normally adept at distin- guishing receiving a p ositive amount from receiving nothing (Cosmides and 6 Tooby 1992). Also Bolton and Zwick (1995) and Abbink et al. (1996) show that if the rules of the game are changed so that the prop oser keeps the share he suggests whether or not the resp onder accepts the o er, the out- come quickly approximates the subgame p erfect equilibrium predicted by the rational actor mo del: the prop oser keeps as much as p ossible, and the resp ondent accepts whatever he is o ered. 2 Homo recipro cans A predisp osition to co op erate and to undertake costly punishment are proba- bly related phenomena. Our prop osed researchinvestigates the implications of combining the two forms of anomalous b ehavior sketched ab ove. We refer to the combination as reciprocal fairness. Ostrom et al. (Gardner, Ostrom and Walker 1990, Ostrom, Walker and Gardner 1992) and Fehr et al. (Fehr and Gachter 1996, Fehr, Gachter and Kirchsteiger 1997, Fehr and Tyran 1996) have provided evidence for the existence of recipro cal fairness in a variety of so cial situations: a ma jority of individuals approach strategic in- teractions involving co ordination problems with a prop ensityto co op erate, they resp ond to the co op eration of others by maintaining or increasing their level of co op eration, and they resp ond to defection on the part of others by retaliating against the o enders, even at a cost to themselves, and even when 7 they cannot reasonably exp ect future p ersonal gains from such retaliation.