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Self-serving biased reference points

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Author Info

  • Andrea Gallice

Abstract

This 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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File URL: http://www.carloalberto.org/assets/working-papers/no.223.pdf
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Bibliographic Info

Paper provided by Collegio Carlo Alberto in its series Carlo Alberto Notebooks with number 223.

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Length: 22 pages
Date of creation: 2011
Date of revision:
Handle: RePEc:cca:wpaper:223

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Related research

Keywords: self-serving bias; reference dependent preferences; litigation; trial vs settlement; bankruptcy problem; optimal allocation;

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References

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  1. Farmer, Amy & Pecorino, Paul, 2002. "Pretrial bargaining with self-serving bias and asymmetric information," Journal of Economic Behavior & Organization, Elsevier, vol. 48(2), pages 163-176, June.
  2. Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
  3. Thomson, William, 2003. "Axiomatic and game-theoretic analysis of bankruptcy and taxation problems: a survey," Mathematical Social Sciences, Elsevier, vol. 45(3), pages 249-297, July.
  4. Koszegi, Botond & Rabin, Matthew, 2004. "A Model of Reference-Dependent Preferences," Department of Economics, Working Paper Series qt0w82b6nm, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  5. B. Douglas Bernheim & Antonio Rangel, 2005. "Behavioral Public Economics: Welfare and Policy Analysis with Non-Standard Decision-Makers," NBER Working Papers 11518, National Bureau of Economic Research, Inc.
  6. Babcock, Linda, et al, 1995. "Biased Judgments of Fairness in Bargaining," American Economic Review, American Economic Association, vol. 85(5), pages 1337-43, December.
  7. Eric Langlais, 2008. "Asymmetric information, self-serving bias and the pretrial negotiation impasse," EconomiX Working Papers 2008-30, University of Paris West - Nanterre la Défense, EconomiX.
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Cited by:
  1. Andrea Gallice, 2012. "Strategic announcements of reference points in disputes and litigations," Carlo Alberto Notebooks 279, Collegio Carlo Alberto.
  2. Yusuke Mori, 2013. "A Formal Behavioral Model of Firm Boundaries: Why Does Authority Relation Mitigate Ex Post Adaptation Problems?," ISER Discussion Paper 0863, Institute of Social and Economic Research, Osaka University.
  3. Mori, Yusuke, 2012. "How Can Integration Reduce Inefficiencies Due to Ex Post Adaptation?," Working Paper Series 142, Center for Japanese Business Studies (HJBS), Graduate School of Commerce and Management Hitotsubashi University.

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