In 1999, Fehr and Schmidt proposed a theory of fairness, competition, and cooperation. The paper addresses the puzzle of why people often cooperate in situations where they could exploit free-riding opportunities, even though punishment is costly. The authors argue that fairness considerations can explain these behaviors, and that the economic environment determines whether fair or selfish types dominate equilibrium behavior. The paper begins by noting that economic models typically assume people act solely in their self-interest, but evidence suggests that fairness plays a significant role in many people's decisions. For example, customers care about the fairness of firms' pricing decisions, and workers' views on fair wages influence firms' wage-setting. However, there is also evidence that people behave selfishly in competitive markets, which seems contradictory. The authors introduce a model of inequity aversion, where individuals dislike unfair outcomes. They show that this model can explain both cooperative and competitive behaviors. Inequity aversion means people resist outcomes that are unfair to them, even if it means sacrificing some material payoff. The model shows that in the presence of some inequity-averse individuals, both "fair" and "cooperative" as well as "competitive" and "noncooperative" behaviors can be explained in a coherent framework. The paper applies this model to various games, including the ultimatum game and market games. In the ultimatum game, the model predicts that proposers will offer a fair share, and responders will reject unfair offers. In market games, the model predicts that competition leads to outcomes that are often considered unfair, but this is because individuals are trying to maximize their own payoffs in a competitive environment. The authors also discuss the role of fairness in cooperation games. They show that inequity aversion can lead to more cooperation than predicted by the standard self-interest model. In particular, they show that in some conditions, even though the self-interest model predicts complete defection, the inequity aversion model predicts full cooperation. The paper concludes that the presence of inequity-averse individuals can significantly affect the outcomes of economic games. The economic environment determines whether fair or selfish types dominate equilibrium behavior, and the model provides a coherent explanation for the observed behaviors in various economic situations.In 1999, Fehr and Schmidt proposed a theory of fairness, competition, and cooperation. The paper addresses the puzzle of why people often cooperate in situations where they could exploit free-riding opportunities, even though punishment is costly. The authors argue that fairness considerations can explain these behaviors, and that the economic environment determines whether fair or selfish types dominate equilibrium behavior. The paper begins by noting that economic models typically assume people act solely in their self-interest, but evidence suggests that fairness plays a significant role in many people's decisions. For example, customers care about the fairness of firms' pricing decisions, and workers' views on fair wages influence firms' wage-setting. However, there is also evidence that people behave selfishly in competitive markets, which seems contradictory. The authors introduce a model of inequity aversion, where individuals dislike unfair outcomes. They show that this model can explain both cooperative and competitive behaviors. Inequity aversion means people resist outcomes that are unfair to them, even if it means sacrificing some material payoff. The model shows that in the presence of some inequity-averse individuals, both "fair" and "cooperative" as well as "competitive" and "noncooperative" behaviors can be explained in a coherent framework. The paper applies this model to various games, including the ultimatum game and market games. In the ultimatum game, the model predicts that proposers will offer a fair share, and responders will reject unfair offers. In market games, the model predicts that competition leads to outcomes that are often considered unfair, but this is because individuals are trying to maximize their own payoffs in a competitive environment. The authors also discuss the role of fairness in cooperation games. They show that inequity aversion can lead to more cooperation than predicted by the standard self-interest model. In particular, they show that in some conditions, even though the self-interest model predicts complete defection, the inequity aversion model predicts full cooperation. The paper concludes that the presence of inequity-averse individuals can significantly affect the outcomes of economic games. The economic environment determines whether fair or selfish types dominate equilibrium behavior, and the model provides a coherent explanation for the observed behaviors in various economic situations.