The Generosity Effect: Fairness in Sharing Gains and Losses
52 Pages Posted: 10 Sep 2013
Date Written: August 29, 2013
We explore the interaction between fairness attitudes and reference dependence both theoretically and experimentally. Our theory of fairness behavior under reference-dependent preferences in the context of ultimatum games, defines fairness in the utility domain and not in the domain of dollar payments. We test our model predictions using a within-subject design with ultimatum and dictator games involving gains and losses of varying amounts. Proposers indicated their offer in gain-and (neatly comparable) loss-games; responders indicated minimum acceptable gain and maximum acceptable loss. We find a significant “generosity effect” in the loss domain: on average, proposers bear the largest share of losses as if anticipating responders’ call for a smaller share. In contrast, reference dependence hardly affects the outcome of dictator games -- where responders have no veto right -- though we detect a small but significant “compassion effect”, whereby dictators are on average somewhat more generous sharing losses than sharing gains.
Keywords: fairness, loss domain, ultimatum game, dictator game, reference-dependent preferences, social preferences
JEL Classification: D03, D81
Suggested Citation: Suggested Citation