Who accepts the pareto axiom? the role of utility and equity in arbitration decisions

Abstract

Some controversy surrounds the role of equity considerations in decisions about resource allocation and policy decisions at the levels of the group, organization, society, and supranational systems. In two descriptive studies arbitration judgments for hypothetical two-party conflicts made by 70 public administration students were compared to predictions from four social welfare functions incorporating equity considerations: Sen's absolute deviation model, Sen's variance model, Keeney and Raiffa's multilinear model, and Rawls' maximin principle. Two experiments—one using regression analyses of ratings, the other using conjoint measurement analyses of rankings—yielded the same conclusions. The arbitration judgments are best described by Sen's absolute deviation model, W = [(a + b)/2] + (1 - )[- | a - b |/2], where W is the arbiter's evaluative rating of a contract which assigns utilities a and b to parties 1 and 2, respectively, and where is an empirical constant representing the tradeoff between utility and equity. This model not only has a better statistical fit to the data than do the others tested, but also predicts the substantial violations of Pareto optimality which did occur. Over half the participants in each experiment showed a willingness to accept reduced total utility in order to obtain a more equitable distribution of utility to the two parties. Implications for axiomatic social welfare functions, for future research, and for policy applications are discussed.