Effects of externalities on emotions: A game-theoretic analysis

Abstract

We model two players’ emotions with externalities as a three-stage game in which each player can disclose their emotional information. To solve for the equilibrium of the game, we work backwards. In equilibrium, we obtain the following results. First, players reveal their emotional information. Second, the factor determining a player's emotion is the externality generated by the other player's effort—a player reveals altruism (envy) if the opponent's effort generates a positive (negative) externality. Third, when players’ efforts generate negative externalities, a prisoner's dilemma arises. Fourth, each player's effort level and payoff change according to combinations of emotions and externalities—e.g., an altruist increases (decreases) their effort levels when the generated positive (negative) externalities increase, enhancing the increase in (mitigating the decrease in) the opponent's payoff.