Peer-Induced Fairness in Games

Abstract

People exhibit peer-induced fairness concerns when they look to their peers as a reference to evaluate their endowments. We analyze two independent ultimatum games played sequentially by a leader and two followers. With peer-induced fairness, the second follower is averse to receiving less than the first follower. Using laboratory experimental data, we estimate that peer-induced fairness between followers is 2 times stronger than distributional fairness between the leader and each follower. Allowing for heterogeneity, we find that 50% of subjects are fairness-minded. We discuss how peer-induced fairness might limit price discrimination, account for low variability in CEO compensation, and explain pattern bargaining.

Keywords: social comparison, peer-induced fairness, distributional fairness, behavioral economics, experimental economics

JEL Classification: A12, A13, C72, D63