Strategic Reciprocity and Preference Formation

Abstract

We model how individual preferences are shaped by strategic reciprocity choices. Our model accounts for heterogeneous players — with intrinsic altruistic, selfish or spiteful preferences — who randomly engage in short-run, as well as long-run, pair- wise interactions. To disentangle the strategic component of preferences, we allow players to act reciprocally in the long-run to conveniently adjust their preferences depending on who they interact with. How they change and what specific kind of preferences emerge in equilibrium crucially depend on whether the short-run strategic interaction is one of strategic complements or substitutes. Our model also predicts that we might observe preference-reversion: players might behave against their intrinsic type exclusively due to strategic considerations. With in- complete information the strategic component of preferences vanishes, equilibrium preferences are as selfish as possible, and thus there is no preference-reversion.

Keywords: Reciprocity, Preference Formation, Altruism

JEL Classification: C72, A13