Stochastic Expected Inequity-Averse Choice

Abstract

This note studies stochastic inequity-averse choice behavior, capturing ex-post fairness and ex-ante fairness. By studying deliberate randomization, we characterize the stochastic choice behavior stemming from Saito [Social Preferences under Risk: Equality of Opportunity versus Equality of Outcome, American Economic Review, 103 (7): 3084-3101]. We find that the violations of first order stochastic dominance (FOSD) and Regularity occur, and that ex-ante fairness can lead to preference reversal phenomena.

Keywords: Inequity Aversion; Ex-Ante Fairness; Ex-Post Fairness; Deliberate Randomization.

JEL Classification: D63; D64; D81; D91