A theory of fairness, competition, and cooperation

There is strong evidence that people exploit their bargaining power in comp etitive markets but not in bilateral bargaining situations. There is also s trong evidence that people exploit free-riding opportunities in voluntary c ooperation games. Yet, when they are given the opportunity to punish free r iders, stable cooperation is maintained, although punishment is costly for those who punish. This paper asks whether there is a simple common principl e that can explain this puzzling evidence. We show that if some people care about equity the puzzles can be resolved. It turns out that the economic e nvironment determines whether the fair types or the selfish types dominate equilibrium behavior.