A theory is proposed in which preferences are conditional on reference points. Preferences conditional on any given reference point satisfy the usual assumptions of cunsumer theory. Apart from a continuity condition, the only additional restriction is to rule out cycles of pairwise choice. The theory is consistent with observations of endowments effects. Under certain assumptions, an exchange economy with reference-dependent preferences will converge to an equilibrium which is Pareto-optimal in an appropriately defined sense.
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Length: 35 pages Date of creation: 1998 Date of revision: Handle: RePEc:fth:eanerc:9803
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Find related papers by JEL classification: C68 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Computable General Equilibrium Models D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
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