On the Explanatory Value of Inequity Aversion Theory

Avner Shaked

Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems from Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich

Abstract: In a number of papers on their theory of Inequity Aversion, E. Fehr and K. Schmidt have claimed that the theory explains the behavior in many experiments. By virtue of having an infinite number of parameters the theory can predict a wide range of outcomes, from the competitive to the cooperative. Its prediction depends on values of these parameters. Fehr & Schmidt provide no explicit methodological plan for their project and as a result they repeatedly make logical and methodological errors. We look at the methodology of their explanations and find that no connection has been established between the experimental data and the behavior predicted by the theory. We conclude that the theory of inequity aversion has no explanatory value beyond its trivial capacity to predict a broad range of outcomes as a function of its parameters.

Date: 2006-09
New Economics Papers: this item is included in nep-upt
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