Is "fair" economically rational? Yes, I know that’s something of a bizarre question, but having just spent a couple weeks embedded in some rather difficult pricing negotiations I was intrigued when I came across a Wharton article on the topic.
Tune into "The Apprentice," and you get an all-too-common view of
business. Every week, all of the wannabe moguls try to impress Donald
Trump by preening, cajoling and conniving. In this world, toughness is
the measure of every CEO, and the boss glories in firing people and
squeezing every penny out of suppliers.
Yet according to John Zhang and Jagmohan Raju,
both Wharton marketing professors, and Tony Haitao Cui, a University of
Minnesota marketing and logistics professor, many people aren’t purely
mercenary in their business dealings. They care about fairness — and
they should, the researchers say, because doing so can maximize their
How does that really work?
When people are fair minded, they don’t need to waste time on
elaborate negotiations or enter into complicated contracts to
coordinate their marketing channel and maximize profitability, the
authors contend in their paper.
Call it a new glove for the Invisible Hand: The manufacturer sets
his price, and the retailer’s sense of fairness takes care of the rest. When the retailer sees that he is being treated
fairly by the manufacturer, he will reciprocate by picking a retail
price that rewards the manufacturer. Because each gets an equitable
share of the channel’s profit, they won’t squabble.
Perhaps we could call that "lean contracting." No, that’s too much of a stretch. But being ivory tower academics, there must be some deep experiential testing behind this theory, right? Right.
Behavioralists, as practitioners are known, have shown with
experiments that people sometimes value fairness over profit
maximization. In one such experiment, called the ultimatum game, one
player receives a sum of money and gets to propose how to split it with
a second player. The second player must accept the proposed division
for either of them to receive any of the cash; if she rejects it, both
end up with nothing. Classical economic theory suggests that the
proposer should keep just about everything for himself — say, 99% —
and offer just a crumb to the person across the table. That way, he has
maximized his benefit, and the other player will accept because she’s a
bit better off than she was.
In reality, responders typically reject
splits in which they receive less than 20%. In some cultures, people
will even reject splits of less than 50/50.
"The ultimatum game tells you that people aren’t hard-nosed economists," Zhang says. "They are fair minded.
However to truly get at the underlying process, we obviously have to look outside of the human species.
Interestingly, chimpanzees recently have been shown not to be burdened
by the same sort of economic scruples. A study conducted by scientists
at the Max Planck Institute of Evolutionary Anthropology in Germany
found that chimps had no concern for fairness. Working with trays and
raisins, they would accept any division as long as they received at
least one raisin, rejecting only offers where they got nothing. They
were, in other words, more economically rational, at least in the
classical sense, than humans.
Perhaps the theory of evolution can also explain the wild rants of some economists?