Inequity aversion
Encyclopedia
Inequity aversion is the preference for fairness and resistance to incidental inequalities. The social sciences that study inequity aversion include sociology
Sociology
Sociology is the study of society. It is a social science—a term with which it is sometimes synonymous—which uses various methods of empirical investigation and critical analysis to develop a body of knowledge about human social activity...

, economics
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...

, psychology
Psychology
Psychology is the study of the mind and behavior. Its immediate goal is to understand individuals and groups by both establishing general principles and researching specific cases. For many, the ultimate goal of psychology is to benefit society...

, anthropology
Anthropology
Anthropology is the study of humanity. It has origins in the humanities, the natural sciences, and the social sciences. The term "anthropology" is from the Greek anthrōpos , "man", understood to mean mankind or humanity, and -logia , "discourse" or "study", and was first used in 1501 by German...

 and ethology
Ethology
Ethology is the scientific study of animal behavior, and a sub-topic of zoology....

.

Human studies

IA research on humans mostly occurs in the discipline of economics
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...

 though it is also studied in sociology
Sociology
Sociology is the study of society. It is a social science—a term with which it is sometimes synonymous—which uses various methods of empirical investigation and critical analysis to develop a body of knowledge about human social activity...

.

Research on IA began in 1978 when studies suggested that humans are sensitive to inequities in favor of as well as those against them, and that some people attempt overcompensation when they feel "guilty" or unhappy to have received an undeserved reward.

A more recent definition of IA (resistance to inequitable outcomes) was developed in 1999 by Fehr and Schmidt. They postulated that people make decisions so as to minimize inequity in outcomes. Specifically, consider a setting with individuals {1,2,...,n} who receive pecuniary outcomes xi. Then the utility to person j would be given by

where α parametrizes the distaste for disadvantageous inequality in the first nonstandard term, and β parametrizes the distaste for advantageous inequality in the final term.

Punishing unjust success and game theory

Fehr and Schmidt showed that disadvantageous IA manifests itself in humans as the "willingness to sacrifice potential gain to block another individual from receiving a superior reward". They argue that this, apparently self-destructive response, is essential in creating an environment in which bilateral bargaining can thrive. Without IA's rejection of injustice, stable cooperation would be harder to maintain (for instance, there would be more opportunities for successful free riders
Free rider problem
In economics, collective bargaining, psychology, and political science, a free rider is someone who consumes a resource without paying for it, or pays less than the full cost. The free rider problem is the question of how to limit free riding...

).

James H. Fowler
James H. Fowler
James H. Fowler is an American social scientist specializing in social networks, cooperation, political participation, and genopolitics...

 and his colleagues also argue that inequity aversion is essential for cooperation in multilateral settings. In particular, they show that subjects in random income games (closely related to public goods games) are willing to spend their own money to reduce the income of wealthier group members and increase the income of poorer group members even when there is no cooperation at stake. Thus, individuals who free ride on the contributions of fellow group members are likely to be punished because they earn more, creating a decentralized incentive for the maintenance of cooperation.

Experimental economics

Inequity aversion is broadly consistent with observations of behavior in three standard economics experiments
Experimental economics
Experimental economics is the application of experimental methods to study economic questions. Data collected in experiments are used to estimate effect size, test the validity of economic theories, and illuminate market mechanisms. Economic experiments usually use cash to motivate subjects, in...

:
  1. Dictator game
    Dictator game
    The dictator game is a game in experimental economics, similar to the ultimatum game. Experimental results offer evidence against the rationally self-interested individual concept of economic behavior, though precisely what to conclude from the evidence is controversial.-Description:In the...

     – The subject chooses how a reward should be split between himself and another subject. If the dictator acted self-interestedly, the split would consist of 0 for the partner and the full amount for the dictator. While the most common choice is indeed to keep everything, many dictators choose to give, with the second most common choice being the 50:50 split.
  2. Ultimatum game
    Ultimatum game
    The ultimatum game is a game often played in economic experiments in which two players interact to decide how to divide a sum of money that is given to them. The first player proposes how to divide the sum between the two players, and the second player can either accept or reject this proposal. ...

     – The dictator game is played, but the recipient is allowed to veto the entire deal, so that both subjects receive nothing. The partner typically vetos the deal when low offers are made. People consistently prefer getting nothing to receiving a small share of the pie. Rejecting the offer is in effect paying to punish the dictator (called the proposer).
  3. Trust game – The same result as found in the dictator game shows up when the dictator's initial endowment is provided by his partner, even though this requires the first player to trust that something will be returned (reciprocity). This experiment often yields a 50:50 split of the endowment, and has been used as evidence of the inequity aversion model.


In 2005, John List modified these experiments slightly to determine if something in the construction of the experiments was prompting specific behaviors. When given a choice to steal money from the other player, even a single dollar, the observed altruism all but disappeared. In another experiment, the two players were given a sum of money and the choice to give or take any amount from the other player. In this experiment, only 10% of the participants gave the other person any money at all, and fully 40% of the players opted to take all of the other player's money.

The last such experiment was identical to the former, where 40% were turned into a gang of robbers, with one catch: the two players were forced to earn the money by stuffing envelopes. In this last experiment, more than two thirds of the players neither took nor gave a cent, while just over 20% still took some of the other player's money.

Other research in experimental economics addresses risk aversion in decision making and the comparison of inequality measures to subjective judgments on perceived inequalities.

Studies of companies

Surveys of employee opinions within firms have shown modern labor economists that IA is very important to them. Employees compare not only relative salaries
Salary
A salary is a form of periodic payment from an employer to an employee, which may be specified in an employment contract. It is contrasted with piece wages, where each job, hour or other unit is paid separately, rather than on a periodic basis....

, but also relative performance against that of co-workers. Where these comparisons lead to guilt or envy, inequity aversion may lower employee morale. According to Bewley (1999), the main reason that managers
Management
Management in all business and organizational activities is the act of getting people together to accomplish desired goals and objectives using available resources efficiently and effectively...

 create formal pay structures is so that the inter-employee comparison is seen to be "fair", which they considered "key" for morale and job performance.

It is natural to think of IA leading to greater solidarity
Solidarity
Solidarity is a Polish trade union federation that emerged on August 31, 1980 at the Gdańsk Shipyard under the leadership of Lech Wałęsa. It was the first non-communist party-controlled trade union in a Warsaw Pact country. Solidarity reached 9.5 million members before its September 1981 congress...

 within the labor pool, to the benefit of the average employee. However, a 2008 paper by Pedro Rey-Biel shows that this assumption can be subverted, and that an employer can use IA to get higher performance for less pay than would be possible otherwise. This is done by moving away from formal pay structures and using off-equilibrium
Economic equilibrium
In economics, economic equilibrium is a state of the world where economic forces are balanced and in the absence of external influences the values of economic variables will not change. It is the point at which quantity demanded and quantity supplied are equal...

 bonus payments
Performance-related pay
Performance-related pay is money paid to someone relating to how well one works. Car salesmen, production line workers, for example, may be paid in this way, or through commission....

 as incentives for extra performance. He shows that the optimal contract
Contract
A contract is an agreement entered into by two parties or more with the intention of creating a legal obligation, which may have elements in writing. Contracts can be made orally. The remedy for breach of contract can be "damages" or compensation of money. In equity, the remedy can be specific...

 for IA employees is less generous at the optimal production level than contracts for "standard agents" (who don't have inequity aversion) in an otherwise identical two-employee model.

Criticisms of inequity aversion

In 2005 Avner Shaked distributed a "pamphlet" entitled "The Rhetoric
Rhetoric
Rhetoric is the art of discourse, an art that aims to improve the facility of speakers or writers who attempt to inform, persuade, or motivate particular audiences in specific situations. As a subject of formal study and a productive civic practice, rhetoric has played a central role in the Western...

 of Inequity Aversion" that attacked the IA papers of Fehr & Schmidt.

An alternative to the concept of a general inequity aversion is the assumption, that the degree and the structure of inequality could lead either to acceptance or to aversion of inequality.

Non-human studies

An experiment on capuchin monkey
Capuchin monkey
The capuchins are New World monkeys of the genus Cebus. The range of capuchin monkeys includes Central America and South America as far south as northern Argentina...

s showed that the subjects would prefer receiving nothing to receiving a reward awarded inequitably in favor of a second monkey, and appeared to target their anger at the researchers responsible for the inequitable distribution of food. Anthropologists suggest that this research indicates a biological and evolution
Evolution
Evolution is any change across successive generations in the heritable characteristics of biological populations. Evolutionary processes give rise to diversity at every level of biological organisation, including species, individual organisms and molecules such as DNA and proteins.Life on Earth...

ary sense of social "fair play" in primates, though others believe that this is learned behavior or explained by other mechanisms. There is also evidence for inequity aversion in chimpanzee
Chimpanzee
Chimpanzee, sometimes colloquially chimp, is the common name for the two extant species of ape in the genus Pan. The Congo River forms the boundary between the native habitat of the two species:...

s (though see a recent study questioning this interpretation). Recent studies suggest that animals in the canidae
Canidae
Canidae is the biological family of carnivorous and omnivorous mammals that includes wolves, foxes, jackals, coyotes, and domestic dogs. A member of this family is called a canid . The Canidae family is divided into two tribes: Canini and Vulpini...

 family also recognize a basic level of fairness, stemming from living in cooperative societies. Animal cognition
Animal cognition
Animal cognition is the title given to the study of the mental capacities of non-human animals. It has developed out of comparative psychology, but has also been strongly influenced by the approach of ethology, behavioral ecology, and evolutionary psychology...

 studies in other biological orders
Order (biology)
In scientific classification used in biology, the order is# a taxonomic rank used in the classification of organisms. Other well-known ranks are life, domain, kingdom, phylum, class, family, genus, and species, with order fitting in between class and family...

 have not found similar importance on relative "equity" and "justice" as opposed to absolute utility
Utility
In economics, utility is a measure of customer satisfaction, referring to the total satisfaction received by a consumer from consuming a good or service....

.

Social inequity aversion

Fehr & Schmidt's IA model may partially explain the widespread opposition to economic inequality
Economic inequality
Economic inequality comprises all disparities in the distribution of economic assets and income. The term typically refers to inequality among individuals and groups within a society, but can also refer to inequality among countries. The issue of economic inequality is related to the ideas of...

 in democracies
Democracy
Democracy is generally defined as a form of government in which all adult citizens have an equal say in the decisions that affect their lives. Ideally, this includes equal participation in the proposal, development and passage of legislation into law...

, although a distinction should be drawn between IA's "guilt" and egalitarianism
Egalitarianism
Egalitarianism is a trend of thought that favors equality of some sort among moral agents, whether persons or animals. Emphasis is placed upon the fact that equality contains the idea of equity of quality...

's "compassion
Compassion
Compassion is a virtue — one in which the emotional capacities of empathy and sympathy are regarded as a part of love itself, and a cornerstone of greater social interconnection and humanism — foundational to the highest principles in philosophy, society, and personhood.There is an aspect of...

", which does not necessarily imply injustice.

Inequity aversion should not be confused with the arguments against the consequences of inequality. For example, the pro-publicly-funded health care
Publicly-funded health care
Publicly funded health care is a form of health care financing designed to meet the cost of all or most health care needs from a publicly managed fund. Usually this is under some form of democratic accountability, the right of access to which are set down in rules applying to the whole population...

 slogan
Slogan
A slogan is a memorable motto or phrase used in a political, commercial, religious and other context as a repetitive expression of an idea or purpose. The word slogan is derived from slogorn which was an Anglicisation of the Scottish Gaelic sluagh-ghairm . Slogans vary from the written and the...

 "Hospitals for the poor become poor hospitals" directly objects to a predicted decline in medical care, not the health-care apartheid that is supposed to cause it. The argument that average medical outcomes improve with reduction in healthcare inequality (at the same total spending) is separate from the case for public healthcare on the grounds of inequity aversion.

See also

  • Altruism
    Altruism
    Altruism is a concern for the welfare of others. It is a traditional virtue in many cultures, and a core aspect of various religious traditions, though the concept of 'others' toward whom concern should be directed can vary among cultures and religions. Altruism is the opposite of...

  • Behavioral economics
  • Equality of outcome
    Equality of outcome
    Equality of outcome, equality of condition, or equality of results is a controversial political concept. Although it is not always clearly defined, it is usually taken to describe a state in which people have approximately the same material wealth or, more generally, in which the general conditions...

  • Equity theory
    Equity theory
    Equity theory is a theory that attempts to explain relational satisfaction in terms of perceptions of fair/unfair distributions of resources within interpersonal relationships...

  • Reciprocity (cultural anthropology)
    Reciprocity (cultural anthropology)
    In cultural anthropology and sociology, reciprocity is a way of defining people's informal exchange of goods and labour; that is, people's informal economic systems. It is the basis of most non-market economies. Since virtually all humans live in some kind of society and have at least a few...

  • Risk aversion
    Risk aversion
    Risk aversion is a concept in psychology, economics, and finance, based on the behavior of humans while exposed to uncertainty....

  • Social preferences
    Social preferences
    Social preferences are a type of preference studied in behavioral and experimental economics and social psychology, including interpersonal altruism, fairness, reciprocity, and inequity aversion.The term "social preferences" incorporates obstreperous Social preferences are a type of preference...


External links

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