Justice and Incentives in a Free Economy

Abstract

How does fairness affect individual incentives and efficiency in a free economy? We show that elementary principles of distributive justice guarantee the existence of a pure-strategy Nash equilibrium in a finite economy where agents non-cooperatively choose their inputs and derive utility from their pay. Chief among these principles is that your pay should not depend on your name, and a more productive agent should not earn less. When these principles are violated, an equilibrium may not exist. We generalize our analysis to economies with social justice and inclusion, implemented in the form of progressive taxation and redistribution, and guaranteeing a basic income to unproductive agents. In addition, we provide conditions that guarantee equilibrium efficiency. Our study uncovers a new class of strategic form games by incorporating normative principles into non-cooperative game theory. Illustrations include applications to surplus distribution and efficiency-enhancing bonus design in a firm and self-enforcing lockdown in a networked economy facing contagion.

Keywords: Market justice, Social justice, Inclusion, Pure strategy Nash equilibrium, Efficiency

JEL Classification: C72, D30, D63, J71, J38