An Extension to the Model of Inequity Aversion by Fehr and Schmidt

Stefania Ottone and Ferruccio Ponzano ()

P.O.L.I.S. department's Working Papers from Department of Public Policy and Public Choice - POLIS

Abstract: The aim of this paper is to improve on the model by Fehr and Schmidt (1999) by developing a non-linear model (that leads to interior rather than corner solutions) and by taking into account that different levels of income imply different reactions of fair-minded people. We suggest to modify the inequity-aversion utility function proposed by Fehr and Schmidt by taking into account not only the difference between players' payoffs, but also their absolute value. This allows for a non-linear utility function where different stakes lead to different unique optimal interior solutions.

JEL-codes: A13 C72 C91 D63 D64 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-upt
Date: Written 2005-11
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Persistent link: http://EconPapers.repec.org/RePEc:uca:ucapdv:51

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