Inequity aversion
People dislike unequal payoffs — resenting getting less, and uneasy getting more.
What it means
A model of social preferences in which individuals derive disutility from unequal outcomes, suffering from being worse off than others (envy or disadvantageous inequity) and, more weakly, from being better off (guilt or advantageous inequity). Formalized by Fehr and Schmidt and by Bolton and Ockenfels, it reconciles seemingly contradictory behavior across games: people reject unfair ultimatum offers, share in dictator games, and cooperate conditionally, all from a taste for fairness. The two coefficients let the same agent be generous in one setting and combative in another. It matters because it gives self-interest-based economics a tractable way to incorporate fairness into wage-setting, pricing, and contract design.
Examples
A worker who learns a peer doing identical work earns more becomes demoralized and less productive, despite no change in their own pay.
In the ultimatum game, people routinely reject twenty pounds out of a hundred, walking away with nothing rather than accept a split that feels like an insult.
The flatmate with the larger bedroom offers to pay more than the even split, uneasy at a deal that quietly favours them.
First described in Fehr & Schmidt (1999); Bolton & Ockenfels (2000).