Abstract. Experimentalists frequently claim that human subjects in the laboratory violate game-theoretic predictions. It is here argued that this claim is usually premature. The paper elaborates on this theme by way of raising some conceptual and methodological issues in connection with the very definition of a game and of players ’ preferences, in particular with respect to potential context dependence, interpersonal preference dependence, backward induction and incomplete information.

Abstract: Many experimental studies indicate that people are motivated by reciprocity. Rabin (1993) develops techniques for incorporating such concerns into game theory and economics. His model, however, does not fare well when applied to situations with an interesting dynamic structure (like many experimental games), because it is developed for normal form games in which information about the sequential structure of a strategic situation is suppressed. In this paper we develop a theory of reciprocity for extensive games in which the sequential structure of a strategic situation is made explicit. We propose a new solution concept— sequential reciprocity equilibrium—which is applicable to extensive games, and we prove a general equilibrium existence result. The model is applied in several examples, including some well known experimental games like the Ultimatum game and the Sequential Prisoners’ Dilemma.

Most economic models are based on the self-interest hypothesis that assumes that all people are exclusively motivated by their material self-interest. In recent years experimental economists have gathered overwhelming evidence that systematically refutes the self-interest hypothesis and suggests that many people are strongly motivated by concerns for fairness and reciprocity. Moreover, several theoretical papers have been written showing that the observed phenomena can be explained in a rigorous and tractable manner. These theories in turn induced a new wave of experimental research offering additional exciting insights into the nature of preferences and into the relative performance of competing theories of fairness. The purpose of this paper is to review these recent developments, to

We introduce a parametric model of other-regarding preferences. The income distribution, other status considerations, and the kindness or unldndness of others' choices ("intentions") systematically affect a person's emotional state. The emotional state then determines the marginal rate of substitution between own and others' payoffs, and thus the person's subsequent choices.

Much of economic analysis stems from the joint assumptions of rationality and individual greed. Common sense and experimental and field evidence point to the limits of this

During the last two decades economists have made much progress in understanding incentives, contracts and organizations. Yet, they constrained their attention to a very narrow and empirically questionable view of human motivation. The purpose of this paper is to show that this narrow view of human motivation may severely limit understanding the determinants and effects of incentives. Economists may fail to understand the levels and the changes in behaviour if they neglect motives like the desire to reciprocate or the desire to avoid social disapproval. We show that monetary incentives may backfire and reduce the performance of agents or their compliance with rules. In addition, these motives may generate very powerful incentives themselves.

A substantial number of people exhibit social preferences, which means they are not solely motivated by material self-interest but also care positively or negatively for the material payoffs of relevant reference agents. We show empirically that economists fail to understand fundamental economic questions when they disregard social preferences, in particular, that without taking social preferences into account, it is not possible to understand adequately (i) effects of competition on market outcomes, (ii) laws governing cooperation and collective action, (iii) effects and the determinants of material incentives, (iv) which contracts and property rights arrangements are optimal, and (v) important forces shaping social norms and market failures.

We examine the characteristics and relative strength of third-party sanctions in a series of experiments. We hypothesize that egalitarian distribution norms and cooperation norms apply in our experiments, and that third parties, whose economic payoff is unaffected by the norm violation, may be willing to enforce these norms although the enforcement is costly for them. Almost two-thirds of the third parties indeed punished the violation of the distribution norm and their punishment increased the more the norm was violated. Likewise, up to roughly 60 % of the third parties punished violations of the cooperation norm. Thus, our results show that the notion of strong reciprocity extends to the sanctioning behavior of ‘‘unaffected’’ third parties. In addition, these experiments suggest that thirdparty punishment games are powerful tools for studying the characteristics and the content of social norms. Further experiments indicate that second parties, whose economic payoff is reduced by the norm violation, punish the violation much more strongly than do third parties.

We study the bidding behavior of spiteful agents who, contrary to the common assumption of self-interest, maximize the weighted difference of their own profit and their competitors ’ profit. This assumption is motivated by inherent spitefulness, or, for example, by competitive scenarios such as in closed markets where the loss of a competitor will likely result in future gains for oneself. We derive symmetric Bayes Nash equilibria for spiteful agents in 1 st-price and 2 nd-price sealed-bid auctions. In 1 st-price auctions, bidders become “more truthful ” the more spiteful they are. Surprisingly, the equilibrium strategy in 2 nd-price auctions does not depend on the number of bidders. Based on these equilibria, we compare revenue in both auction types. It turns out that expected revenue in 2 nd-price auctions is higher than expected revenue in 1 st-price auctions whenever agents have the slightest interest in reducing others’ profit as long as they still care for their own profit. In other words, revenue equivalence only holds for auctions in which all agents are either self-interested or completely malicious.

We explore three two-person public goods games with similar equilibrium predictions, but with different rules of the game, different payoff possibilities, and, as we show, different choices by subjects. Comparisons among games allow inferences of what may or may not determine when the equilibrium prediction is a good approximation of actual behavior. We find that the equilibrium prediction can fail even when incentives off the equilibrium enforce it. Our result suggests that the selfish prediction is prone to deviations when the equilibrium results in unequal distributions of payoffs, and there are alternative outcomes that increase both equality and the payoff of the disadvantaged party. Furthermore, fairness is a function of more than just the final allocations to subjects; it depends on the actions not chosen as well as those that are. Journal of Economic Literature Classification Numbers: C92,