Us and Them: Distributional Preferences in Small and Large Groups

We analyze distributional preferences in games in which a decider
chooses the provision of a good that benefits a receiver and
creates costs for a group of payers. The average decider takes into
account the welfare of all parties and has concerns for efficiency.
However, she attaches similar weights to small and large groups so
that she neglects large provision costs that are dispersed among
many payers. This holds regardless of whether the decider benefits
from the provision or not. A CES utility function which
rationalizes average behavior implies altruism in bilateral
situations and welfare-damaging actions when costs are dispersed.