Social Preferences and Cooperation : A Theoretical Analysis

In this study, we develop a framework to incorporate social preferences such as outcome-based distributional preferences, reciprocity, and image concerns into strategic interactions. We introduce a new equilibrium concept that is an extended version of Nash equilibria and study the one-shot prisoner’s dilemma (PD). The framework has the two components to understand sustaining cooperation: 1) the payoff structure of the objectively given game, which is related to outcome-based social preferences, and 2) the belief structure among players, which is related to reciprocity and social concerns. We examine how cooperation in the one-shot PD is related to social preferences. We then state the conditions consistent with the experimental evidence of the one-shot PD. Finally, we apply our framework to dictator games and trust games to study the effects of image concerns and uncertainty aversion on prosocial behavior and betrayal-averse behavior, respectively