Inequity aversion has been used to explain why outcomes in the ultimatum and dictator games deviate so distinctly from the selfish outcomes generally predicted in economic theory.
a. Derive the predictions of the inequity aversion utility function found in equation 15.1 for Kahneman, Knetsch, and Thaler's experiment in Example 15.4. Assume α = β = 0.5. Remember that utility is now a function of each player's monetary outcome.
b. Derive the predictions of inequity aversion in the prisoner's dilemma.
c. Often, political arguments are made in terms of inequity aversion. For example, in September 2011, thousands of protesters occupied Wall Street and other venues, protesting what they claimed was an unfair economy. Their targets were clearly those making mass amounts of money in investing. Which theories of social preferences would best describe the actions of such protesters? What might these theories say about the response by investors, investment firms, or the government?