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A Random Reference Model

Author

Listed:
  • Özgür Kibris
  • Yusufcan Masatlioglu
  • Elchin Suleymanov

Abstract

We provide two nested models of random reference-dependent choice in which the reference point is endogenously determined by random processes. Random choice behavior is due to random reference points, even though, from the decision-maker's viewpoint, choices are deterministic. Through a revealed preference exercise, we establish when and how one can identify the reference-dependent preferences and the random reference rule from observed choice data. We also present behavioral postulates that characterize the empirical content of our models. Lastly, we investigate an application of our model to Bertrand competition with differentiated products.

Suggested Citation

  • Özgür Kibris & Yusufcan Masatlioglu & Elchin Suleymanov, 2024. "A Random Reference Model," American Economic Journal: Microeconomics, American Economic Association, vol. 16(1), pages 155-209, February.
    • Handle: RePEc:aea:aejmic:v:16:y:2024:i:1:p:155-209
    DOI: 10.1257/mic.20220089
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    More about this item

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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