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Some Social Welfare Implications of Behavioural Preferences

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  • Gallice, Andrea

Abstract

We investigate how the assumption that individuals are characterized by some recent forms of behavioural preferences changes the analysis of an otherwise classical welfare problem, namely the optimal allocation of a scarce resource among a finite number of claimants. We consider two preference specifications: inequity aversion and reference dependence. In the latter case we also study the implications of the claimants displaying a self-serving bias when setting their reference point. Using standard welfare criteria, we compute the optimal allocations that a benevolent social planner should implement in the various scenarios. Results are often remarkably different with respect to traditional (i.e., rational preferences) analysis. We discuss the policy implications and the role of a social planner.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6572.

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Date of creation: Nov 2007
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Handle: RePEc:cpr:ceprdp:6572

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Keywords: inequity aversion; optimum allocation; reference dependence; self-serving bias; social welfare;

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