Self-serving biased reference points
AbstractThis paper formalizes the pervasive phenomenon of the self-serving bias within the framework of reference dependent preferences. This formulation allows the stating of a simple rule to assess the existence of the bias at the aggregate level as well as a procedure that identifies the minimum number of biased agents. We apply the model to two standard situations: a litigation between a plaintiff and a defendant and a bankruptcy problem. In the litigation case, we show how the combination of self-serving bias and reference dependent preferences increases the likelihood that a dispute proceeds to trial. In the bankruptcy case, we show how the existence of individuals with self-serving biased reference points exacerbates the conflict between equity and efficiency of the final allocation.
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Bibliographic InfoPaper provided by Collegio Carlo Alberto in its series Carlo Alberto Notebooks with number 223.
Length: 22 pages
Date of creation: 2011
Date of revision:
self-serving bias; reference dependent preferences; litigation; trial vs settlement; bankruptcy problem; optimal allocation;
Other versions of this item:
- Andrea Gallice, 2009. "Self-serving biased reference points," Department of Economic Policy, Finance and Development (DEPFID) University of Siena 0909, Department of Economic Policy, Finance and Development (DEPFID), University of Siena.
- D03 - Microeconomics - - General - - - Behavioral Microeconomics; Underlying Principles
- K41 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Litigation Process
- D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
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