Economics is sometimes called the ‘dismal science’ because economists routinely
make worst-case assumptions about people’s motives. Certainly, most economic
analysis is based on the self-interest hypothesis, which assumes that all people are
exclusively motivated by their material self-interest. But in recent years, experimental
economists have gathered strong evidence systematically refuting the self-interest
hypothesis. The evidence suggests that many people are also motivated by social
preferences – the interests of others - and that concerns for fairness and reciprocity
cannot be ignored in economic interactions.
Writing in the latest issue of the Economic Journal, Professor Ernst Fehr shows that
fundamental economic questions cannot be properly understood if social preferences
are neglected. He provides evidence for the following claims:
· Competition: it is not possible to understand the nature and impact of competition
when neglecting social preferences. Depending on the specific context, the selfinterest
hypothesis leads economists both to underestimate and overestimate the
impact of competition on wages and prices. Even in competitive markets, wages
and prices are also affected by concerns for fairness and reciprocity.
· Cooperation: it is not possible to understand the nature and determinants of
cooperation and collective action when neglecting social preferences. The selfinterest
hypothesis greatly underestimates the possibilities of cooperation and
collective action because it neglects the retributive forces unleashed by concerns for
fairness and reciprocity. This hampers the proper management of cooperation in
firms, organisations and society as a whole.
· Incentives: it is not possible to understand the nature and impact of material
incentives when neglecting social preferences. Concerns for fairness and reciprocity
themselves constitute powerful material incentives in situations where the selfinterest
hypothesis predicts the absence of any incentives. But material incentives
may also be rendered ineffective if they are not compatible with fairness. Thus,
understanding the interaction between fairness concerns and material incentives is
crucial for the design of proper incentive mechanisms.
ENDS
Note for Editors: ‘Why Social Preferences Matter: The Impact of Non-selfish Motives
on Competition, Cooperation and Incentives’ by Ernst Fehr is published in the March
2002 issue of the Economic Journal. Fehr is Director of the Institute for Empirical
Research in Economics at the University of Zürich.
For Further Information: contact RES Media Consultant Romesh Vaitilingam on 0117-
983-9770 or 07768-661095 (email: romesh@compuserve.com).