Economic Harmony—A Rational Theory of Fairness and Cooperation in Strategic Interactions

Abstract

Experimental studies show that the Nash equilibrium and its refinements are poor predictors of behavior in non-cooperative strategic games. Cooperation models, such as ERC and inequality aversion, yield superior predictions compared to the standard game theory predictions. However, those models are short of providing a general theory of behavior in economic interactions. In two previous articles, we proposed a rational theory of behavior in non-cooperative games, termed Economic Harmony theory (EH). In EH, we retained the rationality principle but modified the players’ utilities by defining them as functions of the ratios between their actual and aspired payoffs. We also abandoned the equilibrium concept in favor of the concept of “harmony,” defined as the intersection of strategies at which all players are equally satisfied. We derived and tested the theory predictions of behavior in the ultimatum game, the bargaining game with alternating offers, and the sequential common-pool resource dilemma game. In this article, we summarize the main tenets of EH and its previous predictions and test its predictions for behaviors in the public goods game and the trust game. We demonstrate that the harmony solutions account well for the observed fairness and cooperation in all the tested games. The impressive predictions of the theory, without violating the rationality principle nor adding free parameters, indicate that the role of benevolent sentiments in promoting fairness and cooperation in the discussed games is only marginal. Strikingly, the Golden Ratio, known for its aesthetically pleasing properties, emerged as the point of fair demands in the ultimatum game, the sequential bargaining game with alternating offers, and the sequential CPR dilemma game. The emergence of the golden ratio as the fairness solution in these games suggests that our perception of fairness and beauty are correlated. Because the harmony predictions underwent post-tests, future experiments are needed for conducting ex ante tests of the theory in the discussed games and in other non-cooperative games. Given the good performance of economic harmony where game theory fails, we hope that experimental economists and other behavioral scientists undertake such a task.