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Inequality aversion is a social preference characterized by a favorability towards more equitable outcomes. An individual with this preference derives higher utility from distributions that are more equal, independent of their own absolute payoff.

Inequality Aversion

An individual is offered a choice between two ways to distribute $30 between themselves and an anonymous stranger. The interaction is one-time only.

*   **Option A:** The individual receives $25, and the stranger receives $5.
*   **Option B:** The individual receives $15, and the stranger receives $15.

If the individual chooses Option B, which of the following principles most accurately explains their decision-making process?

Analyze the project manager's decision in the scenario below. Which social preference most likely guided this choice, and why is an explanation based solely on maximizing personal gain insufficient?

Bonus Distribution Decision

Consider two separate, one-time scenarios involving the distribution of money between a decision-maker and an anonymous stranger.

*   **Scenario 1:** The decision-maker chooses to receive $10 for themselves and give $0 to the stranger, over an alternative of receiving $9 for themselves and giving $0 to the stranger.
*   **Scenario 2:** The decision-maker chooses to receive $8 for themselves and give $8 to the stranger, over an alternative of receiving $10 for themselves and giving $0 to the stranger.

Compare the likely motivation of the decision-maker in Scenario 2 to the motivation of the decision-maker in Scenario 1. What does the choice in Scenario 2 reveal about the decision-maker's preferences?

Comparing Economic Motivations

A purely self-interested economic agent would always choose the option that maximizes their own monetary payoff. However, in many real-world and experimental settings, people often choose outcomes that result in a more even distribution of resources, even at a personal cost. 

Critically evaluate the usefulness of an economic model that incorporates a preference for equitable outcomes to explain this behavior. In your evaluation, discuss both the strengths and potential limitations of using such a model to predict economic decisions.

Evaluating Models of Economic Behavior

True or False: An individual whose choices are characterized by a preference for more equitable outcomes would prefer a scenario where they receive $120 and another person receives $50, over an alternative scenario where they each receive $100.

In a series of one-time interactions, an individual must choose how to split a sum of money between themselves and an anonymous stranger. Match each of the individual's choices with the social preference it best represents.

In an economic experiment, a participant is repeatedly given the choice between two scenarios for distributing a sum of money. Their own payoff is fixed at $10 in both scenarios. They must choose how to allocate an additional sum between two anonymous strangers, Person A and Person B. The table below shows the participant's choices over five independent rounds.

Interpreting Experimental Economic Data

Consider two individuals, Alex and Ben, who are each offered the same choice in a one-time interaction with an anonymous stranger. They can choose one of two options for distributing $20:

*   **Option X:** The individual (Alex/Ben) receives $18, and the stranger receives $2.
*   **Option Y:** The individual (Alex/Ben) receives $10, and the stranger receives $10.

Alex's decision is based solely on maximizing their own monetary gain. Ben's decision is influenced by a preference for more equitable outcomes, even if it means receiving less money personally.

Analyze this situation and predict which option each individual is likely to choose. Justify your predictions by explaining the underlying motivation for each choice.

Predicting Choices Based on Preferences

Construct a hypothetical scenario involving a choice between two different ways to distribute a sum of money between an individual and another person. For each of the two options, clearly state the payoff for the individual and the payoff for the other person. Then, explain which choice would demonstrate a preference for a more equitable outcome, and why this choice reveals that preference.

Demonstrating a Preference for Equity

An economist conducts an experiment where a participant must choose one of two options for distributing a research payment. The participant's choice will determine the payment for themselves and for another anonymous participant they will never meet. The two options are:

*   **Option 1:** The participant receives $12, and the other person receives $12.
*   **Option 2:** The participant receives $14, and the other person receives $6.

The economist observes that a significant majority of participants choose Option 1. Based on this outcome, what can you infer about the social preferences driving the participants' decisions? Explain your reasoning by breaking down the trade-offs involved in the choice.

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