Fairness and Retaliation: The Economics of Reciprocity

IEER Working Paper No. 40

30 Pages Posted: 28 Jun 2000  

Ernst Fehr

University of Zurich - Department of Economics

Simon Gächter

CESifo (Center for Economic Studies and Ifo Institute); IZA Institute of Labor Economics

Date Written: March 2000

Abstract

This paper shows that reciprocity has powerful implications for many economic domains. It is an important determinant in the enforcement of contracts and social norms and enhances the possibilities of collective action greatly. Reciprocity may render the provision of explicit incentives inefficient because the incentives may crowd out voluntary co-operation. It strongly limits the effects of competition in markets with incomplete contracts and gives rise to noncompetitive wage differences. Finally, reciprocity it is also a strong force contributing to the existence of incomplete contracts.

JEL Classification: D89

Suggested Citation

Fehr, Ernst and Gächter, Simon, Fairness and Retaliation: The Economics of Reciprocity (March 2000). IEER Working Paper No. 40. Available at SSRN: https://ssrn.com/abstract=229149 or http://dx.doi.org/10.2139/ssrn.229149

Ernst Fehr (Contact Author)

University of Zurich - Department of Economics ( email )

Blümlisalpstrasse 10
Zuerich, 8006
Switzerland
+41 1 634 3709 (Phone)
+41 1 634 4907 (Fax)

Simon Gächter

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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