Inequity Aversion

Inequity aversion is the preference for relatively equal distributions of resources over distributions that maximize one's own payoff but create large disparities. Formalized by Fehr and Schmidt (1999) and Bolton and Ockenfels (2000), inequity aversion models assume that agents experience disutility both from being worse off than others (disadvantageous inequality) and, to a lesser degree, from being better off than others (advantageous inequality).

The Fehr-Schmidt model predicts many regularities in behavioral game theory experiments: the 40-50% offers in the ultimatum game, the decline of contributions in public goods games, and the punishment of free-riders in common pool resource dilemmas. However, the model struggles to explain hyper-fair offers, context-dependent behavior, and the fact that some agents appear purely self-interested while others are strongly other-regarding.

Inequity aversion is a powerful descriptive model but a thin theory. It tells us that people dislike unequal distributions; it does not tell us why, when the aversion activates, or what counts as the relevant comparison group. A theory of fairness needs a theory of reference groups, and inequity aversion has none.