EFFECTS OF INEQUITY AVERSION ON THE DYNAMICS OF COORDINATION GAMES

Abstract

It is well known that people often behave so that preferable states such as cooperation are realized, even when traditional economics assuming rational agents predicts otherwise. Although many researchers have studied how social preferences can explain such behavior, little is known as to how social preferences influence the outcomes and dynamics of games such as coordination games, where rational agents are expected to realize preferable states. This paper investigates the effects of players’ inequity aversion on the dynamics of coordination games. Replicator dynamics, where fitness is represented by utilities of the players instead of material payoffs, is considered. The dynamics is analyzed analytically and numerically. Inequity aversion is characterized by players’ envy and regret, i.e. the extent to which players dislike disadvantageous and advantageous inequity in payoff, respectively. It was found that the outcome of the game changes when players’ envy is sufficiently large, and that both envy and regret affect the dynamics of the game. Our results show that coordination may not be achieved when players are inequity averse. This paper also demonstrates the importance of the analysis on dynamics of a game, in addition to its equilibria, in studying the influence of social preferences.