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The Welfare Economics of Reference Dependence

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  • Daniel Reck
  • Arthur Seibold

Abstract

We analyze welfare under reference-dependent preferences. We decompose the first-order welfare effects of reference point and price changes into direct and behavioral effects. The sign of these effects depends on the form of reference-dependent payoffs; which effects are welfare relevant depends on whether reference dependence reflects a bias. We characterize corresponding social welfare effects in terms of estimable reduced-form parameters and normative judgments. We apply our framework to reference dependence in German workers' retirement decisions. We find positive welfare effects of local increases in the normal retirement age (NRA) but ambiguous effects of financial incentives to postpone retirement.

Suggested Citation

  • Daniel Reck & Arthur Seibold, 2026. "The Welfare Economics of Reference Dependence," American Economic Journal: Applied Economics, American Economic Association, vol. 18(3), pages 178-219, July.
    • Handle: RePEc:aea:aejapp:v:18:y:2026:i:3:p:178-219
    DOI: 10.1257/app.20240203
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    More about this item

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies
    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions

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