Reference-dependent preferences : rationality, mechanism and welfare implications
AbstractIn this paper, we ask three questions about reference-dependent preferences (RDP) : to what extent can they be said to be irrational ? What is the mechanism that underlies reference dependence? How to design welfare improving policies when preferences are reference-dependent? As to the first question, we characterize three notions of rationality to assess the rationality of RDP and show that there is a sense in which they are rational. As to the second, we show that the effect of a shifting reference point is two-sided : first modifying the relevant criteria for choice and second modifying the desirability of an option. As to the third question we define a welfare ordering based on the comparison of the strength of the status quo bias and show how to relate it to the representation of preferences.
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Bibliographic InfoPaper provided by Université Panthéon-Sorbonne (Paris 1) in its series Cahiers de la Maison des Sciences Economiques with number v04087.
Length: 34 pages
Date of creation: Sep 2004
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Reference-dependent preferences; status quo; rationality; welfare ordering; reference point shifting; implicit criteria; partial orders.;
Find related papers by JEL classification:
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- D00 - Microeconomics - - General - - - General
- A12 - General Economics and Teaching - - General Economics - - - Relation of Economics to Other Disciplines
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