minant of sanctioning behavior. Therefore, approaches that rely on distributional concerns and on rewarding and sanctioning of intentions (as, e.g., in Falk and Fischbacher, 1998) best capture the experimental regularities.
All mentioned fairness theories are rational choice theories in the sense that they allow for interdependent preferences but assume rational individuals. This assumption may be criticized because often people act not fully rational but boundedly rational (e.g., Selten, 1998; Dietz and Stern, 1995). Although we are generally sympathetic with this view, we would like to point out that so far there is no formal model of bounded rationality that is able to predict the experimental results presented in this chapter in a rigorous way.
In the games analyzed in this chapter, the Falk and Fischbacher model and the Fehr and Schmidt model yield similar predictions. We therefore restrict our attention to the latter model because it is relatively easy to apply in our context. The Bolton and Ockenfels model also yields similar predictions in the baseline common-pool resource environment, but predicts a wrong punishment pattern in the common-pool resource game with punishment opportunities. The reason is that in their model, each player does not evaluate fairness toward each other player (as in the Falk and Fischbacher and the Fehr and Schmidt models), but rather toward the group average. This basically means that people are indifferent between punishing defectors or punishing cooperators, a prediction that is at odds with the experimental data. Finally, the Dufwenberg and Kirchsteiger model and the Charness and Rabin model are extremely complicated and often do not generate precise predictions. Both models often predict many equilibria. Finally, we do not apply altruism models (see, e.g., Palfrey and Prisbrey, 1997) because these models are not compatible with sanctions, nor with the fact that people cooperate conditionally.
In the Fehr and Schmidt model, fairness is modeled as “inequity aversion.” An individual is inequity averse if he or she dislikes outcomes that are perceived as inequitable. This definition raises, of course, the difficult question of how individuals measure or perceive the fairness of outcomes. Fairness judgments inevitably are based on a kind of neutral reference outcome. The reference outcome that is used to evaluate a given situation is itself the product of complicated social comparison processes. In social psychology (Adams, 1963; Festinger, 1954; Homans, 1961) and sociology (Davis, 1959; Pollis, 1968; Runciman, 1966), the relevance of social comparison processes has been emphasized for a long time. One key insight of this literature is that relative material payoffs affect people’s well-being and behavior. As we will see, without the assumption that relative payoffs matter at least to some people, it is difficult, if not impossible, to make sense of the empirical regularities observed in common-pool resource experiments. There is, moreover, direct empirical evidence suggesting the importance of relative payoffs. The results in Agell and Lundborg (1995) and Bewley (1998), for example, indicate that relative payoff considerations constitute an important constraint for the internal wage structure of firms. In addition, Clark and Oswald