What is the key way that the Fehr and Schmidt model of other-regarding preferences differs from...

What is the key way that the Fehr and Schmidt model of other-regarding preferences differs from the Bolton and Ochenfels model?

Expert Solution

The term "other-regarding preferences" implies to a situation in which an individual gave preference to his/her income payoff, as well as someone elses too.

Such situation occurs when people give preference to fairness over inequality. Hence, the term is also known as the condition of "inequality aversion".

Both Bolton and Ockenfels model (2000), known as the 'Theory of Equity, Reciprocity and Competition' and Fehr and Schmidt model (1999), known as the 'Theory of Fairness, Competition and Cooperation' tries to explain the economic situation of other-regarding preferences.

The key note of difference between Bolton and Ockenfels model and Fehr and Schmidt model is in their utility functions.

In Bolton and Ockenfels model (2000) of Theory of Equity, Reciprocity and Competition, an individual would like that the average income payoff to everyone should be close to his/her payoffs.

On the other hand, in Fehr and Schmidt model (1999), of Theory of Fairness, Competition and Cooperation, any payoff difference is disliked. It believes in equal payoff to everyone including himself/herself.

Rahul Sunny answered 8 months ago

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