institutional framing and perceptions of fairness

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CONSTITUTIONAL POLITICAL ECONOMY, VOL. 2, NO. 3, 1991 INSTITUTIONAL FRAMING AND PERCEPTIONS OF FAIRNESS* R. Mark Isaac, Deborah Mathieu, Edward E. Zajac** This paper's goal is to construct a positive theory of economic fairness. Using the theoretical schema developed by Hurwicz and others, the paper makes precise the notions of an "institution," "fairness fraiming," and"institutional framing." Four fairness prop- ositions yield an important corollary: the economic environment, the operative institution and history give meaning to the often used FORMAL PRINCIPLE OF DISTRIBUTIVE JUSTICE ("equals should be treated equally, and unequals unequellay, in proportion to relevant similarities and differences"). We support these four propositions and corollary by an analysis of laboratory, survey, and anecdotal evidence. Finally we describe a number of areas for future research. "Long before controls were undermined by external events, the program [1971 wage-price freeze] was being eroded by the cumulative weight of the perceived inequities of administrative decisions .... During the freeze, we sadly observed that every exception to the regulations created one ingrate and two enemies. Economic policies must meet the test of 'fair- ness,' illusive as that standard may be." Professor Arnold R. Weber, former executive director of the Cost of Living Council established to administer the 1971 wage-price freeze. New York Times, August 16, 1981. "Taxes are about more than money and about more than economics. They are about fairness, and this bill is fair." Senator Robert Packwood during the final debate on the 1986 tax reform legislation, as quoted in the New York Times, Sept. 27, 1986. *The authors would like to thank Allen Buchanan, James Buchanan, Joel Feinberg, Elizabeth Hoffman, David Schmitz, Linda Schnabel Stizer, Vernon Smith, Richard Wagner, the participants in the Aspen Institute's Conference on "Local Justice and Fair Allocation", the members of the Industrial Organization Workshop of the Department of Economics at the University of Arizona, and panel participants at the Public Choice Society Meeting for their help and comments at various stages of this paper's preparation. Responsibility for errors is the authors' alone. **R.Mark Isaac, Professor of Economics; Deborah Mathieu, Assistant Professor of Political Science; Edward E. Zajac, Professor of Economics; The University of Arizona, Tuscon, Arizona 85721. 329

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CONSTITUTIONAL POLITICAL ECONOMY, VOL. 2, NO. 3, 1991

INSTITUTIONAL FRAMING AND PERCEPTIONS OF FAIRNESS*

R. Mark Isaac, Deborah Mathieu, Edward E. Zajac**

This paper's goal is to construct a positive theory of economic fairness. Using the theoretical schema developed by Hurwicz and others, the paper makes precise the notions of an "institution," "fairness fraiming," and"institutional framing." Four fairness prop- ositions yield an important corollary: the economic environment, the operative institution and history give meaning to the often used FORMAL PRINCIPLE OF DISTRIBUTIVE JUSTICE ("equals should be treated equally, and unequals unequellay, in proportion to relevant similarities and differences"). We support these four propositions and corollary by an analysis of laboratory, survey, and anecdotal evidence. Finally we describe a number of areas for future research.

"Long before controls were undermined by external events, the program [1971 wage-price freeze] was being eroded by the cumulative weight of the perceived inequities of administrative decisions . . . . During the freeze, we sadly observed that every exception to the regulations created one ingrate and two enemies. Economic policies must meet the test of 'fair- ness, ' illusive as that standard may be . "

Professor Arnold R. Weber, former executive director of the Cost of Living Council established to administer the 1971 wage-price freeze. New York Times, August 16, 1981.

"Taxes are about more than money and about more than economics. They are about fairness, and this bill is fair ."

Senator Robert Packwood during the final debate on the 1986 tax reform legislation, as quoted in the New York Times, Sept. 27, 1986.

*The authors would like to thank Allen Buchanan, James Buchanan, Joel Feinberg, Elizabeth Hoffman, David Schmitz, Linda Schnabel Stizer, Vernon Smith, Richard Wagner, the participants in the Aspen Institute's Conference on "Local Justice and Fair Allocation", the members of the Industrial Organization Workshop of the Department of Economics at the University of Arizona, and panel participants at the Public Choice Society Meeting for their help and comments at various stages of this paper's preparation. Responsibility for errors is the authors' alone.

**R.Mark Isaac, Professor of Economics; Deborah Mathieu, Assistant Professor of Political Science; Edward E. Zajac, Professor of Economics; The University of Arizona, Tuscon, Arizona 85721.

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I. Introduction

I. Background

Al though pe rcep t ions o f wha t is fair and unfair seem of ten to impac t

the fo rmat ion o f e c o n o m i c pol icy at all levels, economis t s have done

compara t ive ly little to s tudy sys temat ica l ly the in teract ion o f e c o n o m i c

pol icy fo rma t ion and pe rcep t ions o f wha t is fair and unfair; indeed,

m a n y economis t s disdain not ions o f fa i rness as i r re levant to their con- cerns . One resul t is tha t economis t s have no posi t ive theory o f how

e c o n o m i c fairness is pe rce ived and utilized. This, we con tend , is a

serious shor tcoming , limiting the predic t ive p o w e r o f e c o n o m i c models , and we offer the prel iminaries o f a posi t ive theo ry o f e c o n o m i c jus t ice in response . l

To but t ress ou r claim that the t radi t ional e c o n o m i c parad igm can be i m p r o v e d - - a n d to suppor t our pos i t ive theo ry o f e c o n o m i c j u s t i c e n w e syn thes ize and ana lyze the impress ive a r ray o f su rvey and labora tory ev idence abou t pe rcep t ions o f fairness and unfairness and their effects on e c o n o m i c behavior . 2 Cons ider , fo r ins tance, the results o f l abora to ry

1 Because we focus on a positive rather than a normative theory of economic justice, we do not attempt to offer any general normative theory of justice, or indeed to offer much in the way of a normative view of justice qua justice.

2 In attempting to construct a positive theory of economic justice (fairness), we are not espousing that what is just is determined by majority vote. Nor are we making the mistake of equating beliefs about justice with justice per se. Instead, we note that most moral theories distinguish between beliefs about what is just (even beliefs held by the majority) and what is just. The majority may be mistaken about what is just, and it may--in response to argument---even come to see that it was mistaken. Indeed, theorizing about justice is an argumentative process in which we revise our moral conceptions in response to critical scrutiny and the demands imposed by public standards of argumentation.

Ronald Dworkin (1971 ) points out that we recognize distinctions between what a group happens to think is just at any particular time and what is just because we recognize that people's moral beliefs are open to criticism on the grounds that those beliefs do not meet the minimal standards for rational argumentation. Dworkin argues that an analysis of our ordinary ways of using moral concepts reveals that we implicitly endorse certain minimal standards of rational argumentation about ethical matters. These standards are built into the complex set of normative beliefs that structure common sense moral consciousness, and are the rules that govern our ordinary usage of the term 'morality.' In this sense, 'what is just' is well defined and not arbitrary.

It should be noted, however, that to uphold the distinction between what is just and the majority's (or "society's") beliefs about or perceptions of what is just one need not be an ethical absolutist (that is, someone who claims that there is one universally valid set of objective moral values). John Rawls (1980, 1985), for instance, demonstrates that it is consistent to eschew moral absolutism and still uphold the conviction that

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experiments involving groups of varying sizes who are asked to distrib- ute various goods. In experiments that are impersonal and involve a "large" number of subjects (twenty or more), a market-like setting typically leads to market like-behavior, and fairness considerations play a minimal role in deciding outcomes. On the other hand, in experiments involving a "small" number of subjects (six or fewer) who personally interact, fairness considerations typically play an important role. Based on these results, one might predict that the creation of internal markets within a corporation will be difficult unless they are impersonal and involve a large number of persons. Thus, it is hardly surprising that "transfer pricing" schemes (what Division A charges Division B for A's products) are often bedeviled by fairness problems (Eccles 1985). Likewise, the " intrapreneurship" movement--a t tempts to set up "intrapreneurs" within a large corporation who were to be given the same freedom of action as "entrepreneurs" outside the corporationm seems to have run its course, with many corporations admitting failure (Wall Street Journal 1990). We suggest that a study of what is already known about the applications of notions of fairness could have pre- dicted, or at least suggested, the possibility of this outcome and thereby might have prevented large financial losses.

The plan of the paper is the following. To set the stage, we conclude this introductory section with an illustrative example. This is followed, in Section II, by a theoretical model, a model we were driven to formu- late as a result of our frustration with the lack of an adequate economic language to discuss fairness results with any precision. Indeed, we find that economists often dismiss discussions of economic fairness as merely muddled thinking--and this may in part reflect the fact that, unlike the situation with standard economic paradigms, a useful lan- guage of fairness has been unavailable to economists. In Section II, we also present a set of four Propositions and a Corollary, which expound on the literature's principal results; and we elaborate on these proposi- tions in Section III. Section IV then presents anecdotal, survey, and experimental evidence in support of our Propositions. Because there is still much work left to be done, the paper concludes in Section V with implications for further research.

considerations of justice are not reducible to descriptions of people's actual external preferences (i.e., their beliefs about what is fair at a given time).

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Although economists are our primary intended audience, we recog- nize that our topic naturally involves and is of interest to other disci- plines, so we have made an effort to minimize economic jargon and to make the paper as accessible as possible. We also acknowledge that a positive theory of economic justice could have profound implications for constitutional studies, but we touch only lightly on them here, and leave deeper analysis for another time.

2. Illustrative Hypothetical Example

Consider the following hypothetical situation: In the past, an academic department has relied on the Dean's bounty to support travel to technical meetings. Travel funding requests have rarely been questioned, and any- one presenting or discussing a technical paper was financed to do so. However, the Dean is due to retire at the end of this year, and his replace- ment has already announced a new regime. Starting next year, each depart- ment in the college will receive a travel budget of TB, where TB is half that spent last year.

One can imagine many possible outcomes. For example, starting next year:

MI. Each of the N departmental faculty members is allotted TB/N for travel to technical meetings;

M2. A faculty member's allotment for travel is set to one-half of this year's allotment.

M3. TB is allotted by rank, with junior-most faculty getting full reimburse- ment, and with faculty members of each higher rank paying a larger fraction of travel out of their own pockets.

M4. Same as M3, but inverted. Seniors get full reimbursement and juniors have to pay more.

M l-M4 are a few of the possibilities; the reader can think of many more. Whatever the allocation, it will not be completely arbitrary. Instead,

whatever allocation scheme is adopted will typically be governed by the familiar rule of treating like cases alike. The obvious justification for allocation method M I is that every faculty member is equal, and therefore all should receive the same funding; while methods M2-M4 rest on various ways of identifying relevant distinguishing characteris- tics among faculty members which would guide the allocation of funds. In addition, not all similarities and differences among faculty members will count. For example, TB will not be allocated on the basis of hair color or on the basis of the make of automobile that each faculty member

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drives; nor will a large fraction of TB be allocated to a member who does no research and has not presented a technical paper within recent memory. Instead, only certain characteristics of the faculty membersu those considered to be relevant to the distribution at hand--will typi- cally be utilized. In short, the distribution of these scarce resources is likely to be guided by the FORMAL PRINCIPLE OF DISTRIBUTIVE JUSTICE. This principle, which has its roots in Aristotle, states that "equals should be treated equally and unequals unequally, in proportion to their relevant similarities and differences. ''3

While this decision-making principle may sometimes supplant self- interest, the two are not always incompatible. Indeed, two important points are germane here:

P1. The fact that the faculty may generally consider the final allocation method used to be "just" because it accords with the FORMAL PRINCI- PLE does not rule out self-interested, strategic behavior in arriving at it. Those who have a large stake in travel money will be motivated to lobby intensely and act strategically to get the "just" method that favors them.

P2. Likewise, agreement to adopt a "just" allocation does not necessarily rule out gains through trade and Pareto efficient outcomes. In order to get an allocation method that favors them, those who travel a great deal can be expected to offer somethingNperhaps support in an upcoming faculty battle over office space allocation--to those who travel little.

In addition, this hypothetical example can be used to illustrate what we can call status quo property rights. 4 Suppose that the new Dean sets TB equal to the amount spent this year, an amount that has not varied for several years. Further, suppose that the patterns of travel have been very stable for many years. Each faculty member has developed a pattern of travel, wherein he or she attends the same meetings, year after year. In that case:

P3. The faculty is very likely to continue the status quo, or at least be heavily influenced by the status quo in confronting the problem of a limited travel budget. The department will, in effect, give a property right to

3 See Aristotle's Nichomachean Ethics (especially Chapter 5) and his Politics (espe- cially chapter 3). This version of the FORMAL PRINCIPLE is taken from Joel Feinberg (1973). See also Bar-Hillel and Yaari (1989) for another translation of Aristotle's principle of justice, as well as for a version from Jouvenal. The principle will be discussed in Section III.

4 We borrow this concept from Owen and Braeutigam (1978). We discuss it in greater detail in Section IV.

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faculty members so that each can attend "his" or "her" meetings, the ones that each has "always attended." The fact that in so doing, different faculty members will spend different amounts of travel money will likely be accepted as a "fair" treatment of equals (and as in accordance with the FORMAL PRINCIPLE), insofar as the relevant similarity has become the ability to maintain one's usual schedule of meetings.

Similarly, we might imagine presenting an economic analyst with the data of the illustrative example and asking the analyst to predict the result of the halving of the department's travel budget. Again, we can think of a wide range of resulting economic models, depending on the training and predilections of the analyst. But the resulting models will also not be completely arbitrary. They will not assume that the alloca- tion will be decided on irrelevant criteria like the make of automobile each faculty member drives, or the color of hair, and so on. They will undoubtedly have certain features in common, like "rational" agents (faculty members, the Departmental Chair, the Dean) following self interest, possibly seeking long run "Pareto improvements." "Public choice" theorists might feel that available data justify nothing fancier than a modeling of such improvements. Analysts with a strong game theory background might create models that take into account asym- metries in the information that the various agents have, that the Chair is acting as a "principal" for multiple faculty "agents," and might solve for the Bayesian-Nash equilibria of a repeated game that the situation suggests.

Thus, both from a "fairness" and an economic viewpoint, we can expect analysts to create a diverse set of models to predict the outcome of the halving of the travel budget. The predictions yielded by the two views will often overlap---but not always. In cases where they differ, we shall use the terminology that, in comparison to self-interested, rational actor economic models, "fairness" considerations have framed the outcome. 5

To make the above ideas more precise, especially the concept of "framing," we next develop an analytical framework that encompasses not only how economic agents cope with fairness issues, but the process of economic modelling.

5. We use the term "framing" to indicate that contextual effects--such as the individu- al's perception of a fair outcome--may cause the subject's behavior to deviate from that predicted by some standard economic model. In most cases, both the economic model and the framing effect will be obvious; when they are not, we will spell them out.

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H. A Model of Institutional Framing

We adopt, in non-mathematical terms, a model of economic interac- tion with roots in, among others, Hayek (1945), and elaborated upon and set out in mathematical terms by Smith (1982), Hurwicz (1960), and Reiter (1977). 6 Imagine a world of economic agents, each of which can be characterized by the agent's preferences, knowledge, and initial endowments. These together constitute an economic environment of private information known only to the agents. Along with the economic environment, define an economic institution as a collection of property rights in communications and exchange [or what North (1990) calls "the rules of the game"]. Finally, using Smith's terminology, define a microeconomic system as the collection of a microeconomic environ- ment together with a microeconomic institution.

Economists are interested not only in a description of an economic system, but also in modeling how people behave. The role of economic theory is to construct such models and to describe the resulting alloca- tions. Different economic theorists might have different paradigms for their behavior theories: Pareto improvements, game theory, competi- tive equilibria, principal agent models. Nevertheless, there would be a standard list for most microeconomic theories, such as: individuals act rationally, they are self-interested, the outcome satisfies some stability (equilibrium) property, etc. We denote the standard theories on this list, the class of rational allocation theories, by T, and denote a specific theory chosen by analyst j to predict a "rational allocation" by R i. Consistency with an economic model is not the only criterion, however, by which we may wish to evaluate allocations. There exist resource allocation vectors which are not consistent with economic models.

Most individuals (economists included) will expect "fair" behavior on the part of agents making any actual allocation." Fairness" consider- ations will be incorporated in the decisions of economic agents. Such "procedural fairness" will not be the end of the story; we can expect each agent to judge the final allocation according to "outcome" or "end-state" fairness criteria as well.

Just as we postulate that individuals have their own preferences, knowledge, and initial endowments, so too will they have individual considerations of what is fair. We denote a specific "fairness model"

6 The reader is referred to these works for a more complete description.

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chosen by individual i to determine a "fair allocation" by b ~. Just as we assume that RJ, a "rational allocation" model chosen by analyst j , is a member of a class T of economic models accepted by the econo- mists, so we assume that individual i will choose F ~ from a wider class, L, of fair allocation models considered legitimate by the society in which i is immersed. The relationship between b n and RJ is central to the Propositions we wish to develop in this paper, namely:

Proposition h Fairness Exists. To economic agent i, a fair allocation model, P , is not arbitrary, but must be consistent with some "legitimate" set of fairness models or theories. We will call this set L (i.e., b n e L).

Proposition II: Fairness Matters. We argue that fairness matters in the sense that when allocations predicted by standard economic theories are perceived as "unfair" by at least some agents, the outcome may be incon- sistent with the economic model. We call this process "fairness framing."

Note: (1) This proposition contrasts ex ante predictions of economic theory with predicted "fair" outcomes--ex post, it is usually easy to construct economic theories that explain anything; (2) it does not rule out self-interested, strategic behavior and gains through trade (see P1 and P2 in the illustrative example); and (3) it does not assert that, in the case in which standard economic predictions are perceived to be "unfair," we will only observe the fair outcomes. Indeed, an open research problem is to determine the conditions under which individual behavior is better predicted by standard economic models or by models which incorporate perceptions of fairness.

Proposition III: Institutional Framing. Both the underlying economic envi- ronment and the operative institution shape perceptions of fairness. In other words, we argue that "fairness framing" may be institution depen- dent.

Note: the point about the role of economic institutions is particularly important to our argument, because it says that an allocation which might be perceived as "unfair" in one institution may not be perceived as unfair within a different institution.

Proposition IV: History Matters. The economic environment and institu- tion are not the only arguments of L. Specifically, the path of prior environ- ments, institutions and allocations influences perceptions of fairness.

Note: one of the most important manifestations of Proposition IV is the influence of what we call "status quo property rights" in some (not all) institutions.

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On its own, the FORMAL PRINCIPLE is vague (e.g., how are "relelvant similarities" to be defined?) and even tautological (are "equals" defined to be those who receive equal treatment?). To be applied in any given situation, it must first be "fleshed out" - -and we offer this as a Corollary to our four Propositions:

Corollary: Assignment o f Meaning to the Formal Principle. In applying the Formal Principle, economic agents will use the economic environment, the operative institution, and history to give meaning to "equality," "inequality," and "relevant similarities and differences".

IlL Legitimate Fairness Models or Theories

Since this paper is primarily intended for an audience of professional economists who are familiar with the large research literature in eco- nomics, we assume that the set, T, of standard economic theories or models, needs no elaboration. Less clear to economists is the nature of L, the set of models or theories for the "fair" allocation of resources that Agent i finds legitimate. The literature relevant to L, residing primarily in moral philosophy, is enormous, and we can only touch on it here.

I. The Formal Principle of Distributive Justice

It is important to note that the FORMAL PRINCIPLE OF DISTRIB- UTIVE JUSTICE demands that people be treated equally only insofar as they have been determined to be equal according to certain relevant considerations. Justice demands that people be judged according to, and only according to, those characteristics that have relevant bearing on the issue at hand. Thus the formal principle insures impartiality and prohibits arbitrary treatment. This standard has been adopted by the U.S. Supreme Court in its interpretation of the equal protection clause of the Fourteenth Amendment. Differences in treatment, the Court ruled in Royster, "must be reasonable, not arbitrary, and must rest upon some ground of difference having a fair and substantial relation to the object of the legislation, so that all persons similarly circum- stanced shall be treated alike. ,,7

7 Royster Guano Company v. Virginia, 253 U.S. 412,415 (1920). And in Reed v. Reed [404 U.S. 71 (1971)], the Court noted that, in applying the equal protection clause, "this Court has consistently recognized that the Fourteenth Amendment does not deny to States the power to treat different classes of persons in different ways. The Equal Protection Clause of that amendment does, however, deny to States the power to legislate that different treatment be accorded to persons placed by a statute into different clases on the basis of criteria wholly unrelated to the objective of that statute."

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A "just inequality" is thus not a contradiction in terms: It simply refers to a distribution in which persons are excluded, or receive less, for some legitimate reason. But what reasons should count as legitimate in any given allocation? The FORMAL PRINCIPLE has no answer: It tells us that only relevant characteristics (whatever they may be) may be taken into account in determining the appropriate treatment of an individual, but the designation of which characteristics are relevant in any given distribution is the function of the material principles.

The goal of material principles of justice, then, is to determine each person's share of a given benefit or burden, and the material principles with which we are familiar--need, equality, productivity, supply and demand--clearly are designed for this purpose) At first glance, these principles seem to have little in common: An equal distribution, for instance, would usually differ markedly from a distribution according to productivity. At this level, H.L.A. Hart (1961: 156) explains, the concept of justice is a "shifting or varying criterion used in determining when, for any given purpose, cases are alike or different. In this respect justice is like the notions of what is genuine, or tall, or warm, which contain an implicit reference to a standard which varies with the classi- fication of the thing to which they are applied."

Because of the wide differences in methods of allocation, some theo- rists conclude that there is no one principle of distributive justice, and that the notion of 'distributive justice' is best regarded as a set of varying, and often conflicting, principles (Rescher 1966; Walzer 1983). In some respects this observation is true. 9 But it is also misleading. It is true insofar as there are indeed a variety of legitimate ways of allocating benefits and burdens; but it is misleading insofar as it overlooks the fundamental precept that binds them together. The mistake, in other words, is in neglecting the important distinction between material prin- ciples of justice (equality, productivity, and so on) and the FORMAL PRINCIPLE of justice.

Can we go further than the generality of the FORMAL PRINCIPLE to characterize material principles? We hypothesize (Propositions III

8 For an extensive list of material principles and a discussion of their application in "local justice" situations, see Elster (1989), Bar-Hillel and Yaad (1989), Walzer (1983), Rescher (1966).

9 And in some important respects our view accords with those of Rescher (1966) and Waizer (1983).

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and IV) that the key is to consider the specific institutions in which the FORMAL PRINCIPLE is applied, as well as historical antecedents.

2. Institutions and Perceptions of Fairness

From childhood onwards, we learn to deal with others fairly (i.e., justly) and to protect ourselves from the unfair acts of others. Of particu- lar concern are arbitrary, capricious, inconsistent--and therefore "unjust' '--actions of the government. Congressmen freely used exam- ples of such instances of unfair treatment to justify their inputs to the latest federal tax reform legislation. It seems clear that perceived injustices have a major impact on the formation of economic policy, at all levels, as it affects individuals in their daily work and as it affects the polity in legislative and judicial actions (Zajac 1985).

Our beliefs about what is just and unjust are often related closely to the institutions within which we function: our family, workplace, social organizations, professional societies, and so on. Our conduct in all of these is governed in a very general way by the FORMAL PRINCIPLE, but the specific way can be quite different for each specific institution. The fact that noble families, secret ethnic societies, and corporate executive suites often promote a self-justified, self-benefiting, subjec- tive view of "just inequality" has been grist for the novelist's mill. At the polar extreme, athletic contests, alcohol and drug rehabilitation centers, the legal adversary system, and the market often use brutally objective standards to determine "just inequalities." The very exis- tence of the institutions in the first set may in fact depend on massive institutional denial of reality, whereas the existence of those in the second set may equally well depend on the institution's ability to inter- pret reality without bias.

Institutions generate reasonable expectations about how one will be treated in a given situation, expectations which in turn influence perceptions of fairness and unfairness, to An individual who possesses a certain level of data regarding the rules and procedures of a particular institution (acquired, e.g., by watching other people succeed or fail, by reading accounts of the way the system works, or by personal attempts to negotiate the system) will most likely also grasp the way in which various personal characteristics are assessed as relevant or not, and

10 This might help to explain Morton Deutsch's (1985: 132) "crude law of social relations: the typical effects of a given social relation tend to induce that social relation."

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thus will formulate expectations about how individuals willmand views about how they should--fare. Thus, for instance, anyone watching a baseball game will note that a batter who swings at the ball and misses three times is not allowed to proceed to first base, and will formulate the reasonable expectation (given the rules of the game and the goals of the institution of baseball) that the next batter who swings and misses the ball three times will not get on base either.

These reasonable expectations--shared by all who understand the rules and goals of the institution in questionmwill in turn lead to a shared notion of what is fair and what is not. This notion of fairness is internal to the framework of the institution: the fairness of the institution itself (or its rules) is a separate question. Thus a batter who swings and misses three times yet is allowed to move to first base would generate an uproar of disapproval by those watching the game: It would be unfair to apply the rules in what seems to be an arbitrary manner. But the condemnation of this move--while saying a great deal about percep- tions of fairness within this particular institutionmsays nothing about the fairness per se of the institution of baseball itself, nor does it assume that the "three strikes and you're out" rule is the best one. The point is, rather, that given this rule within this institution, we can legitimately expect people to be treated a certain way, and those who are treated differently (when no differentiating characteristics are apparent) will be perceived to be treated unfairly. In this way--by generating conceptions of fairness that are particularized--institutions give substance to the formal principle of justice.

In other words, there are two quite different notions of unfairness. The first is internal to the institution, and involves the recognition that the procedures (the institutional rules) are not being applied consis- tent ly-e i ther because irrelevant characteristics of individuals hold sway, or because relevant characteristics of individuals are ignored-- and thus reasonable expectations are thwarted.U The second perception of unfairness is external to the particular institution, and involves the belief that that institution is unjust, so the expectations it generates, while reasonable (given the internal rules of the institution), are not legitimate--and hence the concomitant perceptions of fairness and

11 This would be the case were the batter who "struck out" allowed to proceed to first base anyway.

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unfairness are suspect. Thus although one could recognize the reason- ableness of certain expectations (that, for instance, runaway slaves in the antebellum South would be returned to their masters), one could consistently deny the legitimacy of that implied notion of fairness (that a man's property should be returned to him) as applied to this particular institution (slavery) because of beliefs regarding the corrupt nature of the institution of slavery itself.

We should expect, then, that institutions will change with time and circumstance. Although we do not attempt to construct a theory of institutional change, we do draw one important conclusion from our analysis so far: institutions may alter perceptions of fairness, and per- ceptions of fairness may alter institutions. One institution in which this mutual influence is evident is the U.S. Constitution itself. Anti-slavery judges who had to strangle their consciences in order to uphold Article IV--which asserts that "No person held to Service or Labour in one State, under the Laws thereof, escaping into another, shall in Conse- quence of any Law or Regulation therein, be discharged from such Service or Labour, but shall be delivered up on Claim of the Party to whom such service or Labour may be due' '--could breathe easier when that provision was superseded by the Thirteenth Amendment:" Neither slavery nor involuntary serviture. . .shall exist within the United States."

3. History Matters

Nonetheless, institutional stability--that is, stability of the way in which institutions give substance to the FORMAL PRINCIPLE--is an important part of a positive theory of fairness. Indeed, a world in which the structure of every institution were radically altered daily would be a world of unthinkable chaos. This points to one of the most important manifestations of Proposition IV: the influence of what we call status quoproperty rights in some (but not all) institutions. Status quo property rights exist when members of an institution reasonably regard them- selves as having entitlements to continue the status quo. n

12 Issues of rights and entitlements are enormously complex and controversial, and a host of fundamental questions remain open: Are there rights that outweigh considerations of utility? If so, what are they and how should we argue for them? If not, why not? While fascinating, these questions will not be pursued here. For extended recent discussions of the concept of rights, see Sumner (1987), Wellman (1985), Lomansky (1987), and Dworkin (1977).

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However, even with regard to status quo property rights, institutions matter. Specifically, in some institutions (land title, aristocracy, liberal democracy) perceptions of fairness are heavily influenced by the status quo. Even something as simple as seating in an American university classroom seems to be heavily dependent on history: it takes only a few class sessions for students to stabilize a seating pattern and develop expectations of "my seat." Another example is the policy of rent control in New York City (Zajac 1985). Yet other institutions seem to be relatively independent of legitimacy models based upon status quo property rights. It is not perceived as illegitimate for last year's Super Bowl champions to have a losing season, for instance, nor for a pre- viously indigent teenager to earn millions of dollars as a rock star. Thus we may classify institutions as "SQPR" (status quo property rights) institutions or as "NSQPR" (non-status quo property rights) institu- tions.

Regulatory policy offers a vivid demonstration of the tension between an SQPR institution (liberal democracy) and a NSQPR institution (the market). Indeed, Owen and Braeutigam (1978) argue that one of the primary purposes of regulation as it is practiced in the United States is to provide a kind of social insurance against the uncertainties of the market. 13

IV. Empirical Evidence

Thus, an observer from another planet would find that American society contains a small number of persons, economists, who use a set of models or theories to predict how resources will be allocated. At the same time, the observer would find much discussion of "fairness," a discussion that would often seem vague and confusing but nevertheless is based on some consensus notions of what is "fair" (Proposition I: Fairness Exists). The observer would also find that resource allocation decisions can be heavily influenced by fairness arguments and that resource allocations predicted by economic theories do not always agree with those predicted by application of fairness ideas. Further, when there is disagreement, people will often opt for "fair" allocations

13 Owen and Braeutigam (1978) argue that risk-averse agents are willing to pay a "premium" (loss of economic efficiency through regulation) in order to avoid the sharp swings in well-being which can accompany an unfettered market system.

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(Proposition II: Fairness Matters). ~4 Upon closer look, the observer would then find that what people consider fair often depends on the institution in which the allocations are being made (Proposition III: Institutional Framing), as well as history (Proposition IV: History Mat- ters). Finally the observer would find that the Formal Principle governs allocations that are made, wherein which agents are considered equal or unequal and which similarities and differences are taken into account is determined by institutional context and history (Corollary: Assign- ment o f Meaning to the Formal Principle).

Almost all of the examples of evidence that we cite support Proposi- tions I and II, Fairness Exists and Fairness Matters. For this reason, in marshalling evidence, we concentrate on the last two propositions, Institutions Matter and History Matters.

Before presenting this evidence, we make two remarks. First, our presentation of evidence is meant to be illustrative and not exhaustive. There is already a large literature, encompassing a number of disci- plines, on the general issues of justice and fairness and we make no attempt to survey it completely, nor to bring to bear all possible evi- dence in support of our propositions. Second, we have not found evi- dence that falsifies our propositions, nor, to our knowledge, have exper- iments or surveys been specifically designed and conducted to do so.

1. Fairness Exists

Recent empirical work, principally by means of surveys, supports the notion that "fairness" is not arbitrary but that well formulated notions of fairness exist. 15 Seminal survey work is that of Bar-Hillel

14 We are not suggesting that there is one overarching principle of fairness to which all people subscribe; we are simply observing that economic models sometimes fail to explain people's choices--and we are conjecturing that this is not necessarily because people are acting irrationally, but because they perceive themselves as acting fairly.

15 Equity theory also reinforces our hypothesis that fairness exists, and suggests other directions of research. Equity theory's fundamental principle of "rewards should be proportional to contributions," (widely cited in the equity theory literature and quantified by Walster, Walster and Berschied (1979) into their definitional formula), is a combined FORMAL and MATERIAL PRINCIPLE of distributive justice. One can quarrel with its material principle o r " cardinalization of preferences" aspect, as Deutsch (1985) has and most economists would. But the equity theory literature does seem robustly to support several of our hypotheses. In dividing economic gains or pains, people will start with the FORMAL PRINCIPLE. Then they will identify a relevant institution to decide who should be considered as equals or unequals and the basis for treatment "in proportion to relevant similarities and differences."

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and Yaari (1989). Their starting point is the following taxonomy of material principles of distributive justice: (i) differences in rights or in legitimate claims; (ii) differences in effort, in productivity, or in contribution; (iii) differences in endowments; (iv) differences in needs; (v) differences in tastes, or in the capacity to enjoy various goods; (vi) differences in beliefs. Bar-Hillel and Yaari point out that the bulk of work in experimental economics-game theory has focussed on (iii) [we would add that this has also been the focus of "superfairness" theory (Cf. Baumol 1986)]. By contrast, their work focuses on items (iv)--(vi) dealing with needs, tastes and beliefs.

Their surveys were distributed to thousands of students taking the entrance examinations to Hebrew University (the surveys were appended to the entrance examination). A sample question from their survey is the following:

A shipment containing 12 grapefruit and 12 avocadoes is to be distributed between Jones and Smith. You, the respondent, are asked to do the dividing. The following information is given:

--Jones's metabolism is such that his body derives 100 milligrams of vitamin F from each grapefruit consumed, while it derives no vitamin F whatsoever from avocado.

--Smith's metabolism is such that his body derives 50 milligrams vitamin F from each grapefruit consumed, and also 50 milligrams vitamin F from each avocado.

pBoth persons, Smith and Jones, are interested in the consumption of fruits only insofar as they contain vitamin F (and the more the better). All other traits of the two fruits such as taste, etc., are of no consequence to them.

--After the fruits are divided between them, Jones and Smith will not be able to trade, or to transfer fruits to any third person.

--The fruits are to be divided between Jones and Smith in a manner that is as just as possible. How would you do it?

The respondents were then asked to choose one of a number of sug- gested distributions, or to indicate any other distribution they wished, e.g.:

(a) Jones: 12 grapefruit and 0 avocado (yielding 1200 mg. vitamin F) Smith: 0 grapefruit and 12 avocado (yielding 600 rag. vitamin F)

(b) Jones: 9 grapefruit and 0 avocado (yielding 900 mg. vitamin F) Smith: 3 grapefruit and 12 avocado (yielding 750 rag. vitamin F)

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(c) Jones: 8 grapefruit and Smith: 4 grapefruit and

(d) Jones: 6 grapefruit and Smith: 6 grapefruit and

0 avocado (yielding 800 mg. vitamin F) 12 avocado (yielding 800 mg. vitamin F)

0 avocado (yielding 600 mg. vitamin F) 12 avocado (yielding 900 mg. vitamin F)

(e) Jones: 6 grapefruit and 6 avocado (yielding 600 mg. vitamin F) Smith: 6 grapefruit and 6 avocado (yielding 600 mg. vitamin F)

(f) Some other distribution (specify):

Bar-Hillel/Yaari's original reason for specifying these particular distri- butions is that they are "solutions" provided by the "most prominent distribution mechanisms that have been studied in the economic litera- ture on axiomatic distributive justice" (Bar-Hillel and Yaari 1989: 8)-- for example, the Nash bargaining solution from zero and from equal split, the competitive equilibrium, bargaining over the strong Pareto set, etc. From their original study with this focus, Yaari/Bar-Hillel concluded that "[i]t is our view that the study of distributive justice cannot be oblivious to moral in tu i t ions . . . " (Yaari and Bar-Hillel 1984: 22). In a second study, Bar-Hillel/Yaari (1989) change emphasis (pre- sumably to study "moral intuitions" in more detail) to focus directly on the FORMAL PRINCIPLE, although they do not use this term and their formulation of the FORMAL PRINCIPLE differs in detail from ours. 16

The Bar-Hillel/Yaari schema, as illustrated by the sample question above, is surprisingly general and allows them to study needs, beliefs, and tastes. As they explain (Bar-Hillel and Yaari 1989: 10):

Labeling the good Vitamin F . . . was intended to induce respondents to think of it as answering a need, and to think of the recipients as differing only with respect to their need for the good. We called these Needs problems. In other problems, the recipients were portrayed as differing on other dimensions. One was their beliefs about the vitamin F content of the fruits (e.g., "Jones believes that each grapefruit contains 100 milligrams vitamin F, whereas the vitamin F content of avocado is nil, Smith believes that each grapefruit and each avocado contain 50 milligrams of vitamin F"). We called these Beliefs problems. The other was their liking for the fruits (e.g., when operationalized by their willingness to spend money on them: "Jones likes grapefruit very much, and is willing to pay up to $1.00 per pound for them; he detests avocado, and never buys it. Smith likes

16 In this brief summary, it is impossible to give a comprehensive review of all of Bar- Hillel/Yaari's findings; we can only mention some of the main points.

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both equally, though they are not his favorite fruits, and is willing to pay up to $0.50 per pound for them"). We called these Tastes problems. In Tastes problems, the good was said to be consumed solely for its tastes.

Thus, for the sample "Needs" question cited above, administered to 84 respondents, the percentage responses to (a)--(e) were: (a)--2%; (b)--6%; (c)--80%; (d)--l%; and (e)--I 1%. That is, 80% opted for the distribution that gave Jones and Smith each 800 mg. of vitamin F, while another 11% opted for the one that split the fruits equally between Jones and Smith and, at the same time, gave each 600 mg. of vitamin F.

The following table summarizes the results of Bar-Hillel/YaariH's second study:

TABLE 1: Summary of Bar-Hillel/Yaari 1989 Results

equality proportionality

Needs, one good 10% 90% according to needs Needs, two goods 10% 80% according to needs Beliefs, one good 60% 40% according to beliefs Beliefs, two goods 35% 55% according to beliefs Tastes, one good 75% 20% utilitarian considerations Tastes, two goods 10% 50% utilitarian considerations

Bar-Hillel/Yaari point out several imperfections in their study and confusions in the results. For example , " . . . two interrelated considera- tions are relevant to distributive justicemthe distribution units, and the distribution ideal . . .The first refers to whether one thinks of the distribution in terms of the goods as they occur in their observable units or packaging, or whether one has in mind some other u n i t s . . . The second refers to whether one aims for some particular distribution.. . or whether it is the allocation rule which is of concern. In our questions, the two were often confused" (Ibid.: 29). Further, "[o]ther complica- tions ensue if, for example the vitamin requirements of the recipients differ. In such a case, neither vitamins nor pills may be the essential unit of concern, but rather something like percent of daily vitamin requirement. In our study, the distribution that equalized percent requirement divided the fruits proportionately to need, but this is not the general case" (Ibid.: 30).

Nevertheless, in spite of some infirmities like these, we are struck by the robustness of Bar-Hillel/Yaari's results. Perhaps they would not

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go as far as we in attributing explanatory power to the FORMAL PRINCIPLE. But to us, their data suggest that respondents conduct a textual analysis of the survey questions in order to find some way to divide equally, or, alternatively, proportionately in some "just inequal- ity" sense. As one expects, the subjects differ in their contextual analy- ses. But they typically arrive at either equality or proportionality, with the result being the bimodal distributions indicated in the above table. Thus, the Bar-Hillel/Yaari results show the importance of context; context gives the context-free FORMAL PRINCIPLE specificity in its application. Put another way, the FORMAL PRINCIPLE in a specific context becomes a material principle. These Bar-Hillel/Yaari results foreshadow our propositions that both institutional settings and history can provide the required context.

2. Fairness Matters

The discussion above demonstrates that there are well developed concepts of "fair" and "unfair" allocations. Standing by itself, this demonstration does not explain why economists should be interested in these perceptions. There are at least two potential reasons for consid- eration of "fairness" to be irrelevant to economic analysis. First, it may be possible that distinct notions of fairness exist, but that they have absolutely no influence on individual behavior. In terms of our model, this would mean that the RJ function predicts just as well regard- less of whether or not it coincides with agents' legitimacy models chosen from L. Raising umbrella prices during a heavy rainstorm might be considered more "unfair" than lowering them during a dry spell, but the forces of supply and demand might prevail in either case.

A second possibility is that fairness might matter in principle, but not in practice, for the following reason. Suppose that rational, self interested agents notice that the behavior of individuals in institutions is affected by whether a particular allocation is perceived as being fair. If so, it would make sense to construct and advertise a theory of fairness which coincides with one's preferred outcomes. But if there is easy "entry" into the world of fairness arguments (just listen to the campaign commercials of late October in any election year) then, paradoxically, such arguments may loose their value. Everyone would simply view everyone else's "fairness" argument as a cover for their self interests, and, again the RJ model would predict equally well regardless of the status of agents' L. We argue that neither of the above arguments can

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be completely correct, and that RJ models will predict more or less well depending upon replicable notions of "fairness."

( a ) Voting Experiments of Isaac and Plott. Consider the voting exper- iments of Isaac and Plott (1978). In these experiments, three committee members faced induced preferences over ten abstract alternatives, as illustrated in Table 2. The primary purpose of the research was to investigate the influence of "closed rule" power in committees. This was to be done with regards to some novel theoretical attempts to extend cooperative game theory to voting games lacking transferable utility.

TABLE 2: Incentive Charts (Dollars)

1 2 3 B 26.00 F 33.1)0 E 21.20 G 22.60 E 26.40 F 18.00 J 19.40 I 20.60 H 15.20 A 16.40 D 15.60 J 12.40 H 13.60 H 11.40 D 9.75 C 11.00 C 8.00 I 7.40 D 8.60 G 5.40 B 5.15 I 6.40 A 3.60 G 3.15 E 4.40 J 2.60 A 2.40 F 2.60 B 2.40 C 1.00

Looking at Table 2, it is easy to see that there is a well defined majority rule equilibrium (core), the letter E. The primary treatment in the experiments was to give Voter 1 "closed rule" power. This meant that all motions on the floor must be supported by Voter 1; Voters 2 & 3 were not allowed any amendment power. The only outcome Voters 2 and 3 could obtain without the support of Voter 1 was outcome D, the "default" (adjournment, status quo) outcome. With these voting rules, the extended non-cooperative core concept predicts letter H to be the outcome. In terms of our model, RJ = {H}. In 13 out of 13 experimental voting groups, H was the outcome chosen by the com- mittee.

Isaac and Plott initially interpreted these results as support for the extended core concept. As a robustness check, they also conducted 12 experiments with the "closed rule" power of Voter I removed. Operat- ing under simple majority rule, the extended core model now predicts

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E as the outcome�9 (E was the Condorcet winner.) In fact, consistent with this standard economic model, the outcomes did look dramatically different, but the reliability of the core model was not nearly so strong. Only 6 of the 12 groups arrived at or near the core prediction (E or F). Four of the twelve groups voted for outcome H! Notice what this means�9 In obtaining H instead of E, Voter 2 sacrificed $15 (1977 dollars) while Voter 3 sacrificed $6. Isaac and Plott argue that "fairness" played a role, in the following manner. Notice that option H is near the "middle" of every voter's list. Option E, on the other hand, is first for Voter 3, second for Voter 2, and second last for Voter 1. During discussions, participants repeatedly made note of this fact. It was often articulated that it was "unfair" for Voters 2 and 3 to obtain an outcome high on their list while Voter 1 obtained his second worst outcome�9

In terms of our model of institutional framing, the outcomes can be organized as follows. A standard economic model predicts H in the closed rule core, and E in the simple majority rule case. L however, does not predict (legitimate) E under majority rule, while it does legitimate H. Thus, RJ and F ~ coincide in the closed rule case but they diverge in the simple majority rule case. Looking at the data, we see that the standard economic model predicts very well when it is consistent with L. When the two models are inconsistent, the standard economic model still organizes much of the data, but there are more errors and they are skewed in a "fair" direction.

(b) Anecdotal Evidence from Regulatory and Antitrust Experience�9 Perhaps the areas in scholarly economics research where fairness has received the most attention are regulatory and antitrust economics. Breyer (1982) describes the evolution of the function of American administrative law from "control" of regulatory agencies to oversight to ensure that they achieved "fairness":

Its [administrative law's] original objective was to control government incursions upon private liberty and property interests by relying upon the judiciary . . . . Judges overturned many agency actions until the New Deal.

� 9 Between 1945 and 1976 . . . . Congress passed, and the courts enforced, the federal Administrative Procedures Act (APA). This act imposed certain procedural constraints upon federal administrative bodies--whether located in the executive branch or in independent agencies. Its basic object was to achieve "fairness" rather than "control." (378)

And Owen and Braeutigam (1978: 20) reinforce Breyer:

� 9 The courts and the Congress have collaborated in constructing a law of administrative procedure that has certain economic implications . . . .

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The objective is economic justice or fairness . . . . this is quite explicit; this is what law is all about. There are two features of the administrative process that are of interest. The first is delay. The second is derivative: the grant to individuals and their interest groups of equity rights in the status quo.

Similarly, in discussing the state of antitrust law at the time of their writing (1978: 32), Owen and Braeutigam remark:

� 9 much antitrust policy historically has protected competitors, not com- petition. The whole notion of "unfair" competition and its regulation is consistent with our h y p o t h e s e s . . , antitrust law is not concerned with competition in the efficiency sense, but with competition in the fairness sense. Small firms are better than large ones. Economies of scale are no defense. All mergers are bad . . . . A gloss on antitrust law might, with only slight exaggeration read 'in those markets where courts do not directly control allocation, market actors must be fair to each other. '17

3. Institutions Help Shape Perceptions of Fairness (Institutional Framing)

In the previous subsection, we gave an example in which fairness " m a t t e r e d " in the sense that a standard economic model performed less well when its predicted outcomes were perceived as being unfair than when perceived as being fair. This exercise does not, by itself, give any guidance as to what principles drive the F i models or determine the class L from which they are chosen. In this and the next section, we will consider two specific principles that we believe are important in determining perceptions of fairness: the nature of the institution (institutional framing), and the history of proper ty rights and outcomes in the system.

It is important to emphasize: Our model that institutions matter is not simply one in which "changing the labels" automatically changes the nature of the outcome. For example, Cox and Isaac (1986) describe the difference in purpose (and often in methodology) between market and non-market experiments. Markets have information, feedback, and

17 Most students of antitrust would probably feel that, since Owen and Braeutigam wrote their book in 1978, the federal courts have turned away from fairness toward efficiency. However, this has left the notion of fairness in a vacuum into which have moved some states' attorneys general. They have begun to bring both state and federal actions in attempts to restore into antitrust administration the "fairness" that they feel the federal courts have abandoned.

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disciplinary features that may be absent from non-market experiments (or non-market situations outside the laboratory, for that matter). The result is aggregate behavior characteristic of a market which is often quite different from what would be expected from individuals' decisions in non-market situations (small groups, individual choices, bilateral bargaining, family decision making, etc.). The next section, in our first citation of evidence that Institutions Matter, illustrates the different behaviors found experimentally in market and non-market settings.

(a) Market Experiments. One of the most replicated phenomena in experimental decision making is the tendency of small bargaining groups to produce equal divisions when asked to divide an amount of money. On the other hand, subjects participating in a market are quite capable of obtaining very non-egalitarian outcomes. For example, with more than two buyers and two sellers, double-auction experimental markets exhibit a strong tendency to converge to the competitive equilibrium, even if that equilibrium has some traders earning more than others. The research by Smith and Williams (1987) provides an extreme example of the ability of markets to support non-egalitarian outcomes. Using the computerized double auction as a trading institution, Smith and Williams examined several combinations of market structure and supply and demand configurations which put standard competitive theories to more stringent tests than previous research.~8

One of the configurations examined by Smith and Williams is a market with induced supply and demand curves as depicted in Figure 1.

There are some unusual properties of this design which ought to provide relatively fertile conditions for the "equal split" outcome as opposed to the competitive outcome. First, there is no price at which excess demand is unambiguously and precisely zero. The price of $4.40 is the competitive price in the sense that it is where the supply and demand curves "cross." Secondly, notice that at the competitive equi- librium, all the trading surplus (profits) goes to one side of the market (buyers). It is possible to look at this market and see a microeconomic system which has the "look" of a well defined bilateral bargaining problem in that all buyer reservation values are $5.50 and all seller costs are at $4.40. Furthermore, as prices vary between $ 4.40 and $ 5.50,

18 Thus this body of work is described by the authors as explorations into the "bound- aries" of competitive theory.

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5.50

PRICE

4.40

0 D

QUANTITY Figure 1. Smith and Williams supply and demand conditions.

there are only redistributive (not total-surplus increasing) conse- quences. If equally splitting the pie (surplus) is a ubiquitous rule of thumb, then we would expect to see prices stabilize (or at least average out) near $4.95. They do not. Instead, prices begin in this range, but then drop to very near the predicted market equilibrium of $4.40. (The sellers are usually pushed not quite to zero profit, but rather to a few cents.) Reversing the "swastika" (for the same group or for different groups), so that the crossing is at $5.50, causes prices to climb near to $5.50.

(b) Experiments on Willingness-to-Pay and Willingness-to-Accept. Another example of the effect of institutional structure on market versus non-market perceptions is the wide divergence between what people claim they are willing to pay and what they are willing to accept in hypothetical "questionnaire" type situations. Coursey, Hovis, and Schulze (1986) have demonstrated that the divergence decreases sub- stantially when subjected to market discipline. In other experiments, Knez and Smith (1987) have submitted questionnaires to market traders asking their maximum willingness-to-pay and minimum willingness-to- accept values for assets in the market in which they are about to trade. These asset markets are repeated several times. Among their observations is that individuals' actions in markets repeatedly violate their stated maximum and minimum willingness to trade levels.

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(c) Bargaining Experiments. Siegel and Fouraker (1960) conducted bilateral bargaining experiments with payoffs based upon the conditions of a typical bilateral monopoly situation: a single seller facing a single buyer. The decisions carried market-like terminology ("price," "quan- tity"). Most pairs contracted and the "central tendency of such con- tracts was to be the quantity which maximized joint profits and to be the price which divided these joint profits equally." In later work, (Fouraker and Siegel 1963), however, they used an "unequal strength" condition to see whether it would be possible to obtain the "Bowley" outcomes (the simple monopoly or monopsony predictions) with an institution in which one party had the exclusive right to choose price, with the other bargainer restricted simply to choosing quantity. The result was overwhelming that such "unfair" (our word) outcomes could be obtained. Both repeated bidding and complete information were treatments which mitigated the tendency to go to the Bowley (rather than Pareto optimal) outcomes. Interestingly, it did not seem to matter whether or not the parameters were chosen to make the actual 50-50 split of profits at the Bowley or at the Pareto optimal outcome.

Likewise, not all bargaining experiments necessarily obtain equal splits under all circumstances. Roth and Malouf (1979) examine the effect of information conditions on the bargaining outcome (where their subjects bargain over 100 lottery tickets, i.e. players who received 20 tickets would receive a 20 per cent chance of receiving his prize). When both participants knew both prizes, the division of tickets tended to produce equal expected monetary payoffs. When, however, bargainers knew only their own prizes, the outcomes tended to be closer to a 50- 50 split of the tickets.

Thus, we do not want to argue that "fairness" and "'economic logic" are two completely independent and unrelated forces at work. Rather, it may be precisely because institutions differ in their information, incentive, and feedback characteristics that they generate different material principles of justice. Furthermore, this suggests that those allocation decisions which different people view in different institutional contexts will be very susceptible to acrimonious debates over "fair- ness."

Some very recent experiments are designed specifically to investigate the conditions which can yield outcomes that are more or less "equita- ble" in bargaining situations. In these experiments, the bargaining pro- cess is modelled as a noncooperative game of offer and counter offer.

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Some of these experiments generated outcomes that cluster around various "equal split" outcomes. Other researchers, however, have conducted offer-counter offer experiments in which the bargainers par- ticipate in several repeated bargaining situations. There is evidence from these experiments that bargainers "learn" the underlying game structure and move towards a substantially less"equitable" outcome.~9

In more recent work, Binmore, Morgan, Shaked, and Sutton (1989) report a fascinating series of experiments involving a "shrinking pie" bargaining game. In these experiments, a bargaining "round" consists of an offer from one of two players to split a sum of money; the second person may either accept or reject. If no agreement is reached, the "pie" in the next period is less valuable in one of two ways: either the amount of money to be divided shrinks, or there is a random possibility of a forced termination of bargaining. In the games with no forced breakdown, a player who refuses an offer may voluntarily "opt out" and end the bargaining. Whenever bargaining breaks down, each player receives a pre-assigned share (sl or s2) of the money, where the sum of shares does not exceed unity.

Binmore, et al. describe three possible families of outcomes: (1) "50-50 split" (the breakdown payments sl and s2 are ignored); (2) "deal- me-out" (D-M-O), here, each player receives a 50-50 split unless this causes one person to receive less than his/her breakdown share - - in which case that person receives the breakdown share and the other person gets the remaining amount; and (3) "split the difference" (S-T-D)--players come to the Nash bargaining solution with (sl, s2) as the status quo; in other words, the players split 50-50 the part of the pie left over after the players claim sl + s2.

In the experimental design, standard rational choice game theoretic models predict either D-M-O or S-T-D, depending upon the particular parameters . (Recall that in some situations, D-M-O results in an observed 50-50 split). The results of the experiments showed that the underlying strategic properties of the game were good predictors of people's choices: While 50-50 splits were observed when they coincided with the D-M-O prediction, the 50-50 split was almost never observed when D-M-O predicted uneven splits. Also, when S-T-D became the strategic prediction, there was a distinct shift in the data towards the S-T-D outcome.

19 See Binmore, et.al. (1985), and Harrison and McCabe (1988).

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Perhaps even more provocative is the result of a questionnaire which Binmore, et al. distributed to the participants asking them what they thought was fair. The results of the questionnaire were that individuals' reported views about fairness shifted with the underlying strategic model. So, for example, in games in which S-T-D was the game theoretic prediction, the S-T-D outcome was a good prediction of what the partici- pants reported to be "fair." (It should be noted that there is usually a residual cluster of responses reporting 50-50 to be the fair split regard- less of the strategic properties of the game).

In other recent work, Forsythe, et.al. (1988) also examine the "fair- ness" properties of different manifestations of the bilateral bargaining game. They examine two treatments: "game" and "pay" in a 2 x 2 design. The "game" treatment examines the rules of the division pro- cess. One form is the "ultimatum" game in which one person proposes a split and the second either accepts or rejects (in which case each receives nothing). The second form is the "dictator" game, in which one person is given the unilateral power to divide the pie. In the ultima- tum games, the proposer should, according to the rational self interest equilibrium, give away only the minimum possible amount, usually one cent. In the dictator games, he should give away nothing. However, the proposer is picked at random (random arrival) which the Hoffman and Spitzer [(1982; 1985) see next section] results suggest might lead to an equal split. The second treatment, "pay," indicates whether the players actually obtain the money divided or whether it is a hypothetical decision. The authors also replicate (with different subjects) the experi- ments about five months apart. The following summarizes their results:

1. In the ultimatum games, there is a typical clustering around a 50- 50 split. In the dictator games, there is a distinct shift of the data towards the self-interested equilibrium, but the statistical significance of that shift depends upon how the data are pooled. In the dictator games, many people keep everything, but a majority still give away something.

2. In dictator games, paying subjects money makes a difference. Subjects shift away from equal split outcome when they are paid money. Fewer than 20% give away half of the money, and about 35% keep everything. The effect is ambiguous in ultimatum games.

There are several important implications of these results. Even in the dictator game with pay, a majority of people give s o m e money away, which adds to the weight of similar evidence of other experiments and surveys that individuals are motivated by considerations of fairness.

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On the other hand, the greater incidence of 50-50 splits in the ultimatum games indicates that one must be careful whether one interprets such 50-50 splits as "fair" outcomes. In the ultimatum game, the proposers are dependent upon the other persons in order to receive anything at all. The shift towards 50-50 might be a self-interested response by the proposer, worried about the actions of a "spiteful" non-proposer. But, such a "spiteful" response may be the result of the non-proposer's perceptions as to what is an unfair, and therefore illegitimate, offer. So, there may be in these data a subtle interaction of self-interested behav- ior, fairness, and expectations about other people. 2~

4. History Matters

There is much evidence that individuals' perceptions of fairness and unfairness are influenced by the history of past allocations and property rights. 21

(a) Hoffman-Spitzer "Coase Theorem" Experiments. In laboratory experimental decision making, the classic results are those of Hoffman and Spitzer (1982; 1985) who examined two and three person bargaining in a "Coase" framework. This type of bargaining is distinct from "divid- ing the pie" in at least two respects: a) the total amount of payoffs can vary, i.e. the pie shrinks and grows depending on the group decisions, and b) the default value does not destroy all the resources; if bargaining fails, the participants leave with (typically quite inequitable) default payoffs. A quick description of the "Coase" predictions, standard in the economist's tool kit, would be that bargainers would reach the wealth maximizing outcome regardless of who had the "controller prop- erty rights" (i.e. the right to adjourn the meeting and choose a self- advantageous default value) but that side payments used to obtain this outcome would alter with changes in that property right.

In the first Hoffman-Spitzer experiments, the right to be"controller" was determined by a flip of the coin. The results supported the conten- tion that the groups would bargain to the Pareto optimal levels, but the

20 Young (1990) provides still another possible explanation of phenomena, like the 50- 50 split, that appear to be influenced by "fairness." He argues that, in bargaining, agents will search for some notion of fair division to play the role of a "focal point": a solution that will occur to everyone else.

21 There is also evidence that history and the status quo heavily influence decision making under risk. See Samuelson and Zeckhauser 1988.

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subjects' final division of the resources was usually at or close to "equal split," regardless of which subject was "controller." In subsequent experiments, Hoffman and Spitzer changed the experimental design. They found that a combination of two changes in the environment led to an increase in self-interested individually rational behavior. One change was to instruct subjects that the winner of the coin toss had "earned" the right to be controller; another was to determine who would act as controller by the outcome of a simple parlor game rather than by a coin flip. Both changes in the experimental environment led to an increase in self-interested behavior.

We interpret what is going on in these experiments as follows. Once the controller has been chosen and the experiments have begun, the microeconomic institutions ought to be identical. Apparently, however, the path to those conditions matters. People who obtain the right to be controller by a flip of the coin do not act as though their property rights are what the economic model suggests (i.e., they do not act as though they have the fight to control). But the behavior of those who perceive themselves as "earning" the status of controller by a "merit" system, is much more consistent with the standard model (i.e., they accept more readily their fight to control).

(b) Roth-Schoumaker Expectations and Reputations Experiments. Even the "equal split" result from bargaining experiments is susceptible to the influence of history. Roth and Schoumaker (1983) were able to obtain two-person bargaining results which diverged consistently from the equal-split-in-money outcomes. They did this by controlling bar- gainers' personal history and the reputations of the opponents. This involved the use of computerized players and some deception. The result was that they were able to obtain stable bargaining away from the equal split outcome when one bargainer who had repeatedly obtained less than an equal split was paired with one who had repeatedly obtained more than an equal split, and this history was known to both parties.

(c) Kahneman, Knetsch, Thaler Telephone Surveys. Another avenue through which history is able to influence perceptions of fairness is the establishment of status quo property rights (SQPR). The impact of the perception of status quo property fights is illustrated by the surveys of Kahneman, Knetsch and Thaler (1986). The authors conducted exten- sive telephone surveys to study what is perceived to be fair and unfair in transactions involving firms. In the surveys, respondents were read

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hypothetical scenarios and asked to evaluate the fairness of the scenar- ios' outcomes. Two examples from their paper are the following:

Example I. A small photocopying shop has one employee who has worked in the shop for six months and earns $9 per hour. Business continues to be satisfactory, but a factory in the area has closed and unemployment has increased. Other small shops have now hired reliable workers at $7 an hour to perform jobs similar to those done by the photocopy shop employee. The owner of the photocopying shop reduces the employee's wage to $7.

Acceptable 17% Unfair 83%

Example II. Suppose that, due to a transportation mixup, there is a local shortage of lettuce and the wholesale price has increased. A local grocer has bought the usual quantity of lettuce at a price that is 30 cents higher than normal. The grocer raises the price of lettuce to customers by 30 cents per head.

Acceptable 79% Unfair 21%

Many more questions posing hypothetical scenarios were asked in several waves of telephone surveys. Each scenario involved a firm (merchant, landlord, or employer) making pricing or wage-setting deci- sions that affected the outcomes of one or more transactors (customers, tenants, or employees).

Kahneman, Knetsch and Thaler summarize the results of their fair- ness research in terms of the central concept of a reference transaction. This is defined as a relevant precedent that is characterized by a refer- ence price or wage, and by a positive reference profit to the firm. The authors main finding is a principle of dual entitlement: Transactors have an entitlement to the terms o f the reference transaction and firms are entitled to a reference profit. On the basis of their principle of dual entitlements, Kahneman/Knetsch/Thaler formulate four propositions that summarize their survey findings.

Their dual entitlements principle accords with our Institutions Matter and History Matters propositions under the following interpretation. In their cases of firm-transactor interactions, respondents perceive that the actors in the scenarios are functioning within familiar institutions. Within these institutions, history has identified "reference transac- t ions" which del ineate well-defined standards of " e q u a l s " and

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"unequals" and unequal treatment "in proportion to relevant similarit- ies and differences." As has been found in other survey work on atti- tudes toward risk, their findings include asymmetrical institutional framing effects. For example, Kahneman/Knetsch/Thaler find that respondents consider it fair for a firm to pass cost increases on to customers, but also fair for a firm to pass on only a portion of cost decreases.

(d) Anecdotal Evidence for the Existence of Status Quo Property Rights. One can raise the usual objection to the Kahneman/Knetsch/ Thaler finding that it rests on survey results, not on actual subjects' behavior confronting actual resource allocation decisions. However, the real world of economic policy abounds in instances of status quo property tights conferral. For instance, Zajac (1985) discusses old users paying less than new users for water in Las Vegas, Nevada and for electricity in New York State. The practice of differentially treating old and new users is not confined to Las Vegas and New York; indeed, it is so common in public utility regulation that it has acquired a name: "vintaging." Nor, in regulation, are SQPR institutions confined to pric- ing. They play so large a regulatory role that Owen and Braeutigam (1978) make status quo property rights a cornerstone of their positive theory of regulation. As one of many examples, they cite the mid- seventies FCC radio programming policy. At that time, a radio station could not change format (from classical music to rock, for instance), without a formal FCC heating. Listeners who enjoyed classical music were assumed to have a property right in continuing to enjoy it, and the burden of proof was on the station to demonstrate why it should be allowed to change.

Other examples of SQPR institutions readily come to mind. 22 When a profession has become licensed, "grandfatheting" has been the norm. Existing practioners are usually exempt from having to pass the tests

22 As already alluded to in Section IV.3, NSQPR institutions also abound. In the criminal justice system everyone is supposedly equal before the law, regardless of previ- ous status, as prominent corporate deal makers, TV evangelists, and hotel magnates have recently discovered. Each athletic contest is a de novo event: Except for secondary matters such as seeding in tournaments and choice of playing field, the previous record of the athletes or of their teams is of no consequence. And, of course, the market place sets prices primarily by the laws of supply and demand, and not by what prices have been in the past. In a market economy, daily price fluctuations of items in a supermarket are accepted with equanimity, and, except for extreme price rises, shoppers do not complain.

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for educational qualifications and subject matter knowledge required of new licensees. We have recently seen airline pilots' salaries "grandfath- ered" at significantly higher levels than those of entering pilots. The final days of the Reagan administration saw the passage of the plant closing bill which attempts to preserve the jobs of workers who already have them, at the possible expense of workers in a different part of the U.S. who would like to have them.

(e) Arizona's 1980 Ground Water Law. A final example involves the State of Arizona's 1980 ground water law. The inhabitants of Arizona depend heavily on underground aquifers for their water supply (for example, Tucson has no access to surface water; all of its water is "ground water," pumped from wells). Over time, the levels of the Arizona aquifers have steadily declined to the point where, in the 1970's, the Governor and State legislature decided that drastic measures were needed. The result was a comprehensive revision of the state's ground water law and the creation of a powerful Department of Water Resources (DWR).

As might be expected, the 1980 act did not mandate a water-use policy change that would overnight stop the draw-down of the State's ground water. Instead, the act set up a number of SQPR institutions. The overall goal of the 1980 act is to bring ground water draw-down to a halt by the year 2025. In the jargon of the act, the pumping of the State's ground water is then to be at a "safe yield" of 140 GPCD (gallons per capita per day). To accomplish this, the act endows the Director of the DWR with strong police powers to ensure compliance with the plans, allowing the Director to levy fines of up to $10,000 a day on a non-complying entity.

Of interest here are the plans for the first ten years for the urban areas surrounding Tucson and Phoenix (called "active management areas," or "AMAs" in the act). Both the Tucson and Phoenix AMAs contain numerous water providers in addition to the cities of Tucson and Phoe- nix themselves. In the Tucson AMA, the DWR mandated providers above 140 GPCD to decrease consumption during the first ten years by 25 percent of the excess above 140 GPCD. In the Phoenix area, AMA providers above 140 GPCD were divided into two categories: 140 to 350 GPCD, and above 350 GPCD. The DWR mandated providers in these categories to decrease water consumption in the first ten years by 6 percent and 11 percent respectively.

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Apparently, the adoption of status quo property rights in 1980 seemed so compellingly "fair" that the future was left to take care of itself. The result was widely disparate water consumption targets for the end of the first ten-year period. At the low end were fourteen water providers in the Phoenix AMA and 11 in the Tucson AMA whose target was the safe yield of 140 GPCD; at the high end was the Rio Verde Water Company of the Phoenix AMA with a target of 1,077 GPCD; and there was a distribution of targets in between.

When the act was passed in 1980, the media paid little attention to the disparities in targets for the end of the first ten-year Management Plan, and little was made of which consumer groups were to be viewed as equals and which as unequals and why, nor how unequals were to be treated unequally. In 1989, the City of Tucson's average water consumption stood at 164 GPCD. It had not only failed to achieve its planned decrement of 5 GPCD; its average consumption had increased. The City of Tucson was thus potentially subject to a $10,000/day fine until it complied with the plan. On the other hand, 1989 consumption in the City of Phoenix was 250 GPCD, one GPCD below its target of 251 GPCD. The result of the Department of Water Resources' water consumption audit of 1989 and its consequent actions was an editorial (August 23, 1989) in the Tucson Citizen; we quote excerpts from it:

Whoever set the targets in Arizona's groundwater conservation law must have had water on the b ra in . . . Tucson is getting scolded by the state for exceeding its 1987-88 target. The goal was 155 gallons per day for each person in Tucson. Instead, people in Tucson used. . .an average of 164 gallons per person each day.

That sounds pretty wasteful--until compared to the state's other urban area, Phoenix. Phoenix residents used nearly 100 gallons more per day than Tucson residents: 250. Yet Phoenix is getting a big "Way-ta-go" backslap from the state for alleged "water conservation," because the Phoenix goal was one gallon more than what was used.

While parched Tucsonians sipped a stingy 164 gallons a day, Tempe drank 267; Scottsdale gulped 316; and Sun City gargled 285.

But when it comes to spending water like money, no place in Arizona compares to posh Paradise Valley, where the goal is 787 gallons per day, and the actual use is 848.

We're not suggesting that Tucson should crank open the spigot and let the water flow. Only that Tucson is the last place to criticize for water waste.

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5. Assignment of Meaning to the FORMAL PRINCIPLE

The determination of"fa i r shares" of some economic pie is common- place. Almost all of the evidence that we have cited can be interpreted as supporting our Corollary: "Fair shares" will be determined by the application of the FORMAL PRINCIPLE, wherein economic environ- ment, institutional context, and history give specificity to "equal," "unequal," and "relevant similarities and differences." Thus, an inter- pretation of the Bar-Hillel/Yaari studies is that the division of avocadoes and grapefruit is governed by which institution respondents perceive economic agents to be in--one where "needs" make some persons "unequal" or one where every one is on the same footing. Status quo property rights abound in American antitrust and regulatory law and procedures; the result is that certain economic agents are considered "unequal" in the assignment of "fair shares," etc.

V. Impl icat ions for Research

An implication of this paper is that we can increase economists' contributions to policy making by a systematic research program on perceptions of fairness and unfairness and their consequences for eco- nomic behavior. A rich research agenda on this problem immediately comes to mind; we Conclude by citing four examples of possible items on this agenda.

1. Positive Theory of the Law and Legal Institutions

This paper's results suggest at least two avenues of research for the development of a positive theory of the law and legal institutions. Firstly, constitutional, common, statute, and regulatory law are differ- ent institutions; we can expect that, although there may be much over- lap, they will generally frame legal matters differently�9 Posner (1972) makes this claim with respect to common and statute law and offers a theoretical explanation for it:

The common law method is to allocate responsibilities between people engaged in interacting activities in such a way as to maximize the joint value, or, what amounts to the same thing, minimize the joint cost of the activities�9 (98)

� 9 Unsystematic as our survey of statute law has been . . . . it does suggest that statutes exhibit a less pervasive concern with efficiency and a much greater concern with wealth distribution. (327)

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We would conjecture that, of all the branches, constitutional law is the most concerned with stability and individual rights, while regulatory law is most concerned--even more so than statute lawmwith wealth and income distribution.

Most important is that the differences exist, and part of legal strategy is to get a legal issue into the institution whose framing furthers one's case. 23 A current striking case in point is the debate over Roe v. Wade, with some factions trying to make abortion an issue of constitutional law while others try to make it a statutory issue.

Secondly, our results suggest that it is perilous for the Supreme Court to enter into issues which are particularly sensitive to institutional framing effects. The Court thereby invites endless controversy and political pressures to change its decisions. A very recent example is, Harmelin v. Michigan (1991). A Michigan Court sentenced Harmelin, convicted of possessing 672 grams (1.48 pounds) of cocaine, to a manda- tory term of life in prison without possibility of parole. In his appeal, Harmelin argued that his sentence was"cruel and unusual punishment" and violated his constitutional rights under the Eighth Amendment. Debated at length in the majority and minority opinions is whether the Court should construe the Eighth Amendment as requiring it to apply

23 Richard Wagner has brought to our attention the Poletown Neighborhood Council v. City of Detroit (1981) "'takings" case as a possible example of fairness framing at work. In this case, the City of Detroit exercised eminent domain to acquire, against the wishes of the owners, the land and homes in a Polish district of Detroit (thus "Poletown") in order for General Motors to build a plant that would provide 6000 jobs. Here, eminent domain was exercised not to acquire property for a direct public use such as a road but for a private use with a public purpose--a job-creating private enterprise. Poletown Neighborhood's legal challenge to Detroit's eminent domain power failed in the Michigan Supreme Court.

Professor Wagner has suggested that, in such cases, constitutional arguments represent one form of framing, whereas arguments about keeping GM in Detroit represent an alternative framing, and that people's reactions to matters of fairness and the like, and, by implication, the robustness of constitutional provisions are influenced by such considerations as are explored in this paper.

We indeed agree that the robustness of this and similar "takings" constitutional deci- sions may ultimately hang on how and by what institution they are framed. Constitutional framing by judges and professors of constitutional law may be important. However, in the long run, the more important issue may be the contest between the Poletown residents' status quo property rights to their homes, stores, churches, clubs, etc. and the notion that the general population should be equal to Poletown residents in benefiting from the larger economic pie that GM planned to create.

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the FORMAL PRINCIPLE (called the "proportionality principle" by the Court) or whether the principle's application can be left to the individual states. The five justice majority affirmed the sentence. In the majority opinion Justice Scalia clearly opts for allowing the individual states the freedom to define "proportionality," concluding:

Though the different needs and concerns of other States may induce them to treat simple possession of 672 grams of cocaine a relatively minor offense . . . . nothing in the Constitution requires Michigan to follow suit. (Harmelin v. Michigan 1991: 59LW4847)

Likewise, the Court has avoided interjecting itself into the details of regulation, opting instead for broad decisions that allow regulators much freedom to apply their own fairness standards. Thus, in Ingot Molds (see American Commercial Lines v. Louisville & Nashville RR, 1968) the Court affirmed the Interstate Commerce Commission's use of fully distributed rather than marginal costs as a basis of rate making, and in Federal Power Commission v. Hope Natural Gas (1944) it dropped its earlier (Smyth v. Ames, 1898) "fair return on fair value" basis of public utility rate making in favor of a broader"capital attraction and compara- ble earnings" basis. From the standpoint of allocative efficiency, many economists find Ingot Molds to be a particularly repugnant decision. But on the basis of our fairness results, the Court's interests have probably been better served by not espousing economic doctrines, such as allocative efficiency, that the general public poorly understands in favor of allowing regulators to bend to the popular will.

2. Fairness Arguments as a Veil

As mentioned in Section IV.2, if "fairness" arguments are robustly important, would there not be an incentive to "enter" with new fairness arguments which produce more advantageous outcomes? If there is free entry by fairness arguments, would not the whole idea of fairness arguments collapse? Would they not cease to make a difference because everyone recognizes fairness arguments as a veil for the underlying interest arguments? This indicates that there are "barriers to entry" for fairness arguments, further suggesting some over-arching moral framework to organize such barriers, a framework which perhaps can be studied experimentally, with surveys, and by an examination of anecdotal evidence.

Our four propositions suggest that both "fairness arguments" and "rights and resources" matter in human behavior. By themselves, these

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propositions do not tell us the conditions under which one matters more than the other. This predictive power is provided only when the propositions are applied to concrete institutions and institutional history. For example, the experimental data indicate that multi-agent market institutions tend to be where we observe behavior explained primarily by the economists' paradigms of rights and resources, while small group (2 or 3 person) non-market processes are where we are most likely to observe behavior consistent with predictions of equitable division.

But these two arenas do not cover all of human behavior. What of small group, market-like settings, or the behavior of an intermediate number of persons (say 4-20) engaged in quasi-market decisions involv- ing public goods, or the behavior of large committees? We argue that, with these environments, there is support for both "fairness" and "rational choice" models (both F and R j outcomes), and that these are logical areas for further research.

3. Classification and Characterization of Institutions

Institutions need not be codified; the real property rights of a system may be different from the apparent property rights as described in writing. For example, the written law of two different states may equally provide that the speed limit on rural interstates is 65 m.p.h. But that information is not enough for the traveller from the first state who wisely inquires whether or not the highway patrol in the second state recognizes an (unwritten) 5 m.p.h, buffer before issuing tickets. From the Hoffman and Spitzer research, we see instances in which the de jure property rights as defined by the written code are apparently not translated into de facto property rights by the participants. However, this appears to change as other parts of the institution evolve (for example, assign the controller power to whoever "earns" the fight by winning a game of calculation rather than by a flip of the coin). We need a parsimonious scheme for classifying and characterizing institutions.

Elster (1989) has made an impressive start on this task. He has constructed an extensive taxonomy of "the main criteria used in select- ing recipients of scarce goods and necessary burdens"mwhat we would call "material principles." Examples of his criteria are : lotteries, rota- tion (taking turns), queuing, waiting lists, seniority, age, and sex. Elster follows this taxonomy with a taxonomy of"the main causal mechanisms

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that go into the selection of a selection mechanism," including adminis- trators' having to take into account: (1) their desire to achieve main goals like giving jobs to the best qualified or admitting the most able students, (2) exogenous forces, including public opinion, (3) the incen- tive effects of their decisions, (4) the costs of their decisions, (5) the fear of complaints, including litigation, (6) their need to strike bargains with other administrators, (7) their desire to capture resources, and (8) their need to cope with the internal bureaucracy of their institutions. The combination of Elster's two taxonomies gives a start on the problem of classification and characterization of institutions, but, as Elster (1989: 21) states in a preface to his second taxonomy, "At present I am not able to formulate any robust or even plausible generalizations�9 I can offer only a list of mechanisms that are often observed to play an important role in the final selection of a principle for selecting the final recipients of the good." More needs to be done.

4. Conditions for the Emergence of Altruism

In one set of questions, Bar-Hillel/Yaari asked subjects to imagine that they themselves were to be the recipients of grapefruits or avoca- dos. The results were altruistically skewed from previous results; when imagining that they were either Jones or Smith, subjects demanded less for themselves and awarded more to the other party. Bar-Hillel/Yaari comment:

� 9 it seems that the introduction of self-interest into this problem pro- moted generosity rather than greed. The combination of hypothetical ques- tions, low stakes and social desirability may render this tendency suspect, yet it is in line with the common courtesy of choosing the smaller of two pieces when one gets first choice, and with studies [e.g., Guth, Schmittber- ger, and Schwarze (1982)] which found that subjects, when put in a position where they alone determine how some reward is to be distributed between themselves and another, 'nearly never ask for more than their fair share � 9 and if the rewards are rather low, they even deviate . . , to their own disadvantage' (Guth 1988: 14).

These findings immediately raise a fundamental question about equal- split experimental or survey outcomes: Do two persons split a reward 50-50 because each perceives a mutual right to half the pie or because the outcome is mutually charitable? It may be that many of the existing experimental results make it difficult to distinguish between justice and charity. However, this does not mean that it is experimentally

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impossible to distinguish between the two. As an example, suppose that Hoffman and Spitzer had found equal split outcomes robust across different institutional forms of assignment of the controller power. Such a result, in contrast to their actual findings, could have been interpreted as more consistent with charity or altruism than of the development of rights, justice, or the perception of a fair outcome. An obvious research challenge is to design and carry out experiments that distinguish between justice and charity and that delineate circumstances when one or the other is to be expected.

5. Conditions for the Emergence of Group Cooperation

Self-interest seems not completely to explain the emergence of group cooperation. For example, public goods provision environments pro- vide choices in which both self interest and fairness have been assigned a role. In such environments, there is typically a divergence, even for the selfish agenda, between individual non-cooperative rationality and group wealth maximization. Standard economic models can alterna- tively predict: (I) substantial under-provision of the public good (as a finitely rated process with an iterated dominant strategy to under-reveal demand for the public goods), (2) efficient provision (as an infinitely repeated process with discount rates which support a tit-for-tat strategy) or (3) indeterminate results (multiple equilibria). More recent work in asymmetric information models [Kreps, et. al. (1982)] allows for periods of cooperation in even a finitely repeated game.

On the other hand, some have argued that none of these self-inter- ested, rational actor models can explain the non-trivial amount of public goods provision seen in some, but riot all, experiments, and that models which incorporate altruism and/or fairness are a necessity for organizing the data [see, for example, Andreoni (1987) and Marwell & Ames (1981)]. More generally, there is an enormous literature, spanning sev- eral disciplines, that puts forth a number of "rational choice" models in attempts to explain the emergence and persistence of cooperative or group behavior [see, for example, Axelrod (1986), Coleman (1990), Lewis (1969), Orbell, et al.(1988), and Ullmann-Margalit (1977)]. An obvious research question is whether or not the fairness theory intro- duced here can enrich or supplant these models.

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