Strategic reciprocity and preference formation

Abstract

We model how individual preferences are shaped by strategic reciprocity choices. Our model accounts for heterogeneous players — with intrinsic altruistic, selfish or spiteful preferences —who randomly engage in short-run, as well as long-run, pairwise interactions. To disentangle the strategic component of preferences we allow players to act reciprocally in the long-run to conveniently adjust their preferences depending on who they interact with. How they change and what specific kind of preferences emerge in equilibrium crucially depend on whether the short-run strategic interaction is one of strategic complements or substitutes. Our model also predicts that we might observe behavior-reversion: players might behave against their intrinsic type exclusively due to strategic considerations. With incomplete information the strategic component of preferences vanishes, equilibrium preferences are as selfish as possible, and thus there is no behavior-reversion.