Tit for tat: Foundations of preferences for reciprocity in strategic settings

Abstract

This paper assumes that in addition to conventional preferences over outcomes, players in a strategic environment have preferences over strategies. It provides conditions under which a player’s preferences over strategies can be represented as a weighted average of the utility from outcomes of the individual and his opponents. The weight one player places on an opponent’s utility from outcomes depends on the players’ joint behavior. In this way, the framework is rich enough to describe the behavior of individuals who repay kindness with kindness and meanness with meanness. The paper identifies restrictions that the theory places on rational behavior. © 2006 Elsevier Inc. All rights reserved. JEL classification: C72; D63

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