A Theory of Status-Mediated Inequity Aversion

We introduce a new social utility function which relates inequity aversion to social status, effort, and ability. The basic idea is as follows: Actors do not suffer from inequality but from inequity relative to a fair share that reflects some normative orientation the actors have internalized. In this regard we advocate the rule of proportionality which states that rewards should be proportional to some standard of comparison. We apply this social utility function to various games from non-cooperative and cooperative game theory and interpret the results with respect to the effects of social status on behavioral outcomes.