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Do social preferences matter in competitive markets?

  • Paul Heidhues

    (Department of Economics, University of Bonn)

  • Frank Riedel

    ()

    (Institute of Mathematical Economics, Bielefeld University)

Experimental evidence stresses the importance of so–called social preferences for understanding economic behavior. Social preferences are defined over the entire allocation in a given economic environment, and not just over one’s own consumption as is traditionally presumed. We study the implications for competitive market outcomes if agents have such preferences. First, we clarify under what conditions an agent behaves as if she was selfish—i.e. when her demand function is independent of others’ behavior. An agent behaves as if selfish if and only if her preferences can be represented by a utility function that is separable between her own utility and the allocation of goods for all other agents. Next, we study equilibrium outcomes in economies where individual agents behave as if selfish. We show that one can identify a corresponding ego–economy such that the equilibria of the ego–economy coincide with the equilibria of the original economy. As a consequence, competitive equilibria exist and they are material efficient. In general, however, the First Welfare Theorem fails. We introduce the class of Bergsonian social utility functions, which are social utility functions that are completely separable in all agents’ material utility. For such social preferences, the Second Welfare Theorem holds under a suitable growth condition. We also establish that in uncertain environments, agents with social preferences typically do not behave as if selfish. Furthermore, in the presence of public goods, both demand and equilibrium outcomes depend on social preferences.

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File URL: http://www.imw.uni-bielefeld.de/papers/files/imw-wp-392.pdf
File Function: First version, 2007
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Paper provided by Bielefeld University, Center for Mathematical Economics in its series Working Papers with number 392.

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Length: 30 pages
Date of creation: May 2007
Date of revision:
Handle: RePEc:bie:wpaper:392
Contact details of provider: Postal: Postfach 10 01 31, 33501 Bielefeld
Phone: +49(0)521-106-4907
Web page: http://www.imw.uni-bielefeld.de/

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  1. Borglin, Anders, 1973. "Price characterization of stable allocations in exchange economies with externalities," Journal of Economic Theory, Elsevier, vol. 6(5), pages 483-494, October.
  2. Matthew Rabin., 1992. "Incorporating Fairness into Game Theory and Economics," Economics Working Papers 92-199, University of California at Berkeley.
  3. Dufwenberg, Martin & Kirchsteiger, Georg, 2004. "A theory of sequential reciprocity," Games and Economic Behavior, Elsevier, vol. 47(2), pages 268-298, May.
  4. David K. Levine, 1998. "Modeling Altruism and Spitefulness in Experiment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(3), pages 593-622, July.
  5. Falk, Armin & Fischbacher, Urs, 2001. "A Theory of Reciprocity," CEPR Discussion Papers 3014, C.E.P.R. Discussion Papers.
  6. Hochman, Harold M & Rodgers, James D, 1969. "Pareto Optimal Redistribution," American Economic Review, American Economic Association, vol. 59(4), pages 542-57, Part I Se.
  7. Charness, Gary B & Rabin, Matthew, 2001. "Understanding Social Preferences With Simple Tests," University of California at Santa Barbara, Economics Working Paper Series qt0dc3k4m5, Department of Economics, UC Santa Barbara.
  8. Collard, David, 1975. "Edgeworth's Propositions on Altruism," Economic Journal, Royal Economic Society, vol. 85(338), pages 355-60, June.
  9. Rader, Trout, 1980. "The second theorem of welfare economics when utilities are interdependent," Journal of Economic Theory, Elsevier, vol. 23(3), pages 420-424, December.
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