Inequity aversion

Inequity aversion (IA) is the preference for fairness and resistance to inequitable outcomes.cite journal | last = Fehr | first = E. | coauthors = Schmidt, K. M. | authorlink = Ernst Fehr | year = 1999 | title = A theory of fairness, competition, and cooperation | journal = The Quarterly Jornal of Economics | volume = 114 | pages = 817–868 | doi = 10.1162/003355399556151 ] The social sciences that study inequity aversion in humans include sociology, economics, and psychology, while it is studied in non-humans in anthropology. Inequity aversion is one type of social preferences.

Human studies

IA research on humans mostly occurs in the discipline of economics though it is also studied in sociology.

Research on IA began in 1978 when studies suggested that humans are sensitive to inequities in favor of as well as those against them, and that some people attempt overcompensation when they feel 'guilty' or unhappy to have received an undeserved reward. [ cite book | year = 1978 | last = Walster | coauthors = Berscheid | title = Equity: theory and research]

A more recent definition of IA (resistance to inequitable outcomes) was developed in 1999 by Fehr and Schmidt. They postulated that people make decisions so as to minimize inequity in outcomes. Specifically, consider a setting with individuals {1,2,...,n} who receive pecuniary outcomes x_i. Then the utility to person "j" would be given by

U_j({x_i}) = x_j + frac{alpha}{n-1} * Sigma{max(x_j - x_i,0)} + frac{eta}{n-1}* Sigma{max(x_i - x_j,0)},

where alpha parametrizes the distaste for disadvantageous inequality in the first nonstandard term, and eta parametrizes the distaste for advantageous inequality in the final term.

Punishing unjust success and game theory

Fehr and Schmidt showed that disadvantageous IA manifests itself in humans as the "willingness to sacrifice potential gain to block another individual from receiving a superior reward". They argue that this, apparently self-destructive, response is essential in creating an environment in which bilateral bargaining can thrive. Without IA's rejection of injustice, stable co-operation would be harder to maintain (for instance, there would be more opportunities for successful free riders).

James H. Fowler and his colleagues also argue that inequity aversion is essential for cooperation in multilateral settings. [Fowler JH, Johnson T, Smirnov O. "Egalitarian Motive and Altruistic Punishment," "Nature" 433: doi:10.1038/nature03256 (6 January 2005)] In particular, they show that subjects in "random income" games (closely related to public goods games) are willing to spend their own money to reduce the income of wealthier group members and increase the income of poorer group members even when there is no cooperation at stake. [Dawes CT, Fowler JH, Johnson T, McElreath R, Smirnov O. "Egalitarian Motives in Humans," "Nature" 446: 794-796, doi:10.1038/nature05651 (12 April 2007)] Thus, individuals who free ride on the contributions of fellow group members are likely to be punished because they earn more, creating a decentralized incentive for the maintenance of cooperation.

Experimental economics

Inequity aversion is broadly consistent with observations of behavior in three standard economics experiments:

# Dictator game - The subject chooses how a reward should be split between himself and another subject. If the dictator acted self-interestedly, the split would consist of 0 for the partner and the full amount for the dictator. While the most common choice is indeed to keep everything, many dictators choose to give, with the second most common choice being the 50-50 split.
# Ultimatum game - The dictator game is played, but the recipient is allowed to veto the entire deal, so that both subjects receive nothing. The partner typically vetos the deal when low offers are made (similarly to the behavior of brown capuchins). People consistently prefer getting nothing to receiving a small share of the pie. Rejecting the offer is in effect paying to punish the dictator (called the "proposer").
# Trust game - The same result as found in the dictator game shows up when the dictator's initial endowment is provided by his partner, even though this requires the first player to trust that something will be returned (reciprocity). This experiment often yields a 50:50 split of the endowment, and has been used as evidence of the inequity aversion model.

Other research in experimental economics addresses risk aversion in decision making [Berg, Joyce E., and Thomas A. Rietz's University of Iowa Discussion Paper, from 1997 "Do Unto Others: A Theory and Experimental Test of Interpersonal Factors in Decision Making Under Uncertainty" examines the increased risk aversion from lottery-choice games to multi-party dealing. It suggests that this could be explained by altruism and a concern for an equitable distribution among all parties (fairness). This paper also used the phrase 'inequity aversion'] and the comparison of inequality measures to subjective judgments on perceived inequalities.Yoram Amiel (Author), Frank A. Cowell: "Thinking about Inequality: Personal Judgment and Income Distributions", 2000]

Studies of companies

Surveys of employee opinion within firms have shown modern labour economists that IA is very important to them. Employees compare not only relative salaries, but also relative "performance" against that of co-workers. Where these comparisons lead to guilt or envy Inequity Aversion may lower employee morale. According to Bewley (1999) the main reason that managers create formal pay structures is so that the inter-employee comparison is seen to be 'fair', which they considered 'key' for morale and job performance. [Bewley, T. (1999) "Why wages don’t fall during a Recession". Harvard University Press, ISBN 0-674-95241-3]

It is natural to think of IA leading to greater 'solidarity' within the labour pool, to the benefit of the average employee. However, a 2002 paper by Pedro Rey Biel shows that this assumption can be subverted, and that an employer can use Inequity Aversion to get higher performance for less pay than would be possible otherwise ( [http://www.homepages.ucl.ac.uk/~uctppre/iati251004c.pdf] ). In Biel's model this is done by moving away from formal pay structures and using off-equilibrium bonus payments as incentives for extra performance. He shows that the optimal contract for IA employees is less generous at the optimal production level than contracts for 'standard agents' (who don't have inequity aversion) in an otherwise identical two-employee model.

Criticisms of Inequity Aversion

In 2005 Avner Shaked distributed a "pamphlet" entitled "The Rhetoric of Inequity Aversion" that attacked the IA papers of Fehr & Schmidt. [Shaked, Avner, 2005. "The Rhetoric of Inequity Aversion" Bonn University( [http://ssrn.com/abstract=675227] )]

An alternative to the concept of a general inequity aversion is the assumption, that the "degree" and the structure of inequality could lead either to acceptance or to aversion of inequality.

Non-human studies

An experiment on capuchin monkeys showed that the subjects would prefer receiving nothing to receiving a reward awarded inequitably in favor of a second monkey, and appeared to target their anger at the researchers responsible for the inequitable distribution of food. [cite journal | last = Brosnan | first = S. F. | coauthors = de Waal, F. B. M. | year = 2003 | title = Monkeys reject unequal pay | journal = Nature | volume = 425 | pmid = 13679918 | pages = 297 | doi = 10.1038/nature01963 ] Anthropologists suggest that this research indicates a biological and evolutionary sense of social "fair play" in primates, though others believe that this is learned behaviour. Aside from humans and brown capuchins, there is evidence for inequity aversion in chimpanzees. [cite journal | last = Brosnan | first = S.F. | year = 2004 | title = Tolerance for inequity may increase with social closeness in chimpanzees | journal = Proceedings of the Royal Society on Biological Sciences | url = http://userwww.service.emory.edu/~sbrosna/Manuscripts/Brosnan%20PRSL%202005.pdf | pmid = 15705549 | volume = 272 | issue = 1560 | pages = 253–8 | doi = 10.1098/rspb.2004.2947 | format = subscription required | unused_data = |coauthors, Schiff, H. C. & de Wall, F. B. ] Animal cognition studies in other biological orders have not found similar importance on "relative" 'equity' and 'justice' as opposed to "absolute" utility.

Social inequity aversion

Fehr & Schmidt's IA model may partially explain the widespread opposition to economic inequality in democracies, although a distinction should be drawn between IA's "guilt" and egalitarianism's "compassion", which does not necessarily imply "injustice".

Inequity aversion should not be confused with the arguments against the "consequences" of inequality. For example, the pro-publicly-funded health care slogan "Hospitals for the poor become poor hospitals" directly objects to a predicted decline in medical care, not the health-care apartheid that is supposed to cause it. The argument that average medical outcomes improve with reduction in healthcare inequality (at the same total spending) is separate from the case for public healthcare on the grounds of inequity aversion.

ee also

* Altruism
* Behavioral economics
* Equality of outcome
* Reciprocity (cultural anthropology)
* Risk aversion
* Social preferences
* Spite house - a home or other building built to annoy and aggravate someone, usually a neighbor, in response to a perceived inequitable situation.

References

External links

* [http://news.bbc.co.uk/cbbcnews/hi/animals/newsid_3121000/3121148.stm Summary of the "Monkeys like fair play" Capuchin experiment] for kids, from the BBC.
* [http://news.nationalgeographic.com/news/2003/09/0917_030917_monkeyfairness.html "Monkeys Show Sense Of Fairness, Study Says"] (National Geographic News, September 172003).
* [http://www.physiology.emory.edu/FIRST/sarah.htm Sarah Brosnan's Emory University homepage listing her inequity research publications.]
* [http://www.vwl.uni-muenchen.de/ls_schmidt/pamphlet/Shaked-Reply.pdf Fehr & Schmidt's March 2005 response to Shaked's critique]
* [http://pages.stern.nyu.edu/~mbaccara/ag.pdf Anger and Guilt: An Alternative to Inequity Aversion Models] - Raúl López Pérez defines the Fehr and Schmidt IA model mathematically as well as proposing a different formulational of 'emotional' deviations from rationality.


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