Rotten Kids with Bad Intentions

40 Pages Posted: 8 Feb 2010

See all articles by Nick Netzer

Nick Netzer

University of Zurich

Armin Schmutzler

University of Zurich - Department of Economics; Centre for Economic Policy Research (CEPR)

Date Written: January 2010

Abstract

We examine a "Rotten Kid" model (Becker 1974) where a player with social preferences interacts with an egoistic player. We assume that social preferences are intention-based rather than outcome-based. In a very general multi-stage setting we show that any equilibrium must involve mutually unkind behavior of both players, endogenously generating negative emotions rather than positive altruism. In a large class of two-stage games that includes principal-agent and gift-giving games, this prevents equilibrium from being materially Pareto efficient. Compared to the subgame-perfect equilibrium without social preferences, efficiency is still generally increased. On the other hand, the materialistic player has lower whereas the reciprocal player has higher material payoffs, so that reciprocity does not increase equity: For sufficiently strong reciprocity concerns, the materialistic player ends up with a negligible share of the gains from trade.

Keywords: Gift Giving, Moral Hazard, Psychological Games, Reciprocity

JEL Classification: C72, D03, D86, J01

Suggested Citation

Netzer, Nick and Schmutzler, Armin, Rotten Kids with Bad Intentions (January 2010). CEPR Discussion Paper No. DP7667, Available at SSRN: https://ssrn.com/abstract=1547607

Nick Netzer (Contact Author)

University of Zurich ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland

Armin Schmutzler

University of Zurich - Department of Economics ( email )

Zürich, CH-8006
Switzerland

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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