A Theory of Reciprocity

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Abstract
This paper presents a formal theory of reciprocity. Reciprocity means that people reward kind actions and punish unkind ones. The theory takes into account that people evaluate the kindness of an action not only by its consequences but also by the intention underlying this action. The theory explains the relevant stylized facts of a wide range of experimental games. Among them are the ultimatum game, the gift-exchange game, a reduced best-shot game, the dictator game, the prisoner's dilemma, public goods games, and the investment game. Further, the theory explains why subjects behave differently in treatments where they experience the actions of real persons compared to treatments where they face 'actions' caused by a random device. Finally, the theory explains why in bilateral interactions outcomes tend to be ''fair'' whereas in competitive markets even extremely unfair distributions may arise.

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