What Can Economists Explain by Taking into Account People’s Perceptions of Fairness: Punishing Cheats, Bargaining Impasse, and Self-Perpetuating Inequalities

Evidence abounds that individuals have preferences for being fairly treated and treating others fairly. These preferences do not affect economic outcomes in competitive markets with standardized products. They do affect economic outcomes in a wide variety of other settings where information is imperfect or enforcement is costly. This paper reviews experimental evidence that overwhelmingly refutes the hypothesis that individuals are concerned only with their material self-interest and shows why in some competitive environments, the self-interest hypothesis is nevertheless so successful. [Background Paper for Human Development Report 2006]