Interdependent Preferences and Reciprocity

Abstract

Experiments, ethnography, and introspection provide evidence economic agents do not act to maximize their narrowly defined self interest. Expanding the domain of preferences to include the utility of others provides a coherent way to extend rational choice theory. There are two approaches for including extended or social preferences in strategic models. One posits that agents have extended preferences, but maintains the conventional assumption that these preferences are stable. Prominent examples of this approach permit agents to exhibit concern for status, inequality, and social welfare. The other approach permits the strategic context to determine the nature of individual preferences. Context-dependent preferences can capture the possibility that agents are motivated in part by reciprocity. They may sacrifice personal consumption in order to lower the utility of unkind agents or to raise the utility of kind agents. This paper surveys the evidence in favor of social preferences and describes the implications of the leading theoretical models of extended preferences. It presents behavioral assumptions that characterize different types of social preferences. It investigates the extent to which social preferences may arise as the limit of evolutionary processes. It discusses the relationship between norms of reciprocity and social preferences in repeated interactions.