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Self-serving biased reference points

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  • Andrea Gallice

Abstract

This paper formalizes the pervasive phenomenon of the self-serving bias within the framework of reference dependent preferences. This formulation allows the stating of a simple rule to assess the existence of the bias at the aggregate level as well as a procedure that identifies the minimum number of biased agents. We apply the model to two standard situations: a litigation between a plaintiff and a defendant and a bankruptcy problem. In the litigation case, we show how the combination of self-serving bias and reference dependent preferences increases the likelihood that a dispute proceeds to trial. In the bankruptcy case, we show how the existence of individuals with self-serving biased reference points exacerbates the conflict between equity and efficiency of the final allocation.

Suggested Citation

  • Andrea Gallice, 2011. "Self-serving biased reference points," Carlo Alberto Notebooks 223, Collegio Carlo Alberto.
    • Handle: RePEc:cca:wpaper:223
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    File URL: http://www.carloalberto.org/assets/working-papers/no.223.pdf
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    References listed on IDEAS

    as
    1. Linda Babcock & George Loewenstein, 1997. "Explaining Bargaining Impasse: The Role of Self-Serving Biases," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 109-126, Winter.
    2. Botond Kőszegi & Matthew Rabin, 2006. "A Model of Reference-Dependent Preferences," The Quarterly Journal of Economics, Oxford University Press, vol. 121(4), pages 1133-1165.
    3. B. Douglas Bernheim & Antonio Rangel, 2005. "Behavioral Public Economics: Welfare and Policy Analysis with Non-Standard Decision-Makers," NBER Working Papers 11518, National Bureau of Economic Research, Inc.
    4. Farmer, Amy & Pecorino, Paul, 2002. "Pretrial bargaining with self-serving bias and asymmetric information," Journal of Economic Behavior & Organization, Elsevier, vol. 48(2), pages 163-176, June.
    5. Babcock, Linda, et al, 1995. "Biased Judgments of Fairness in Bargaining," American Economic Review, American Economic Association, vol. 85(5), pages 1337-1343, December.
    6. Eric Langlais, 2008. "Asymmetric information, self-serving bias and the pretrial negotiation impasse," EconomiX Working Papers 2008-30, University of Paris Nanterre, EconomiX.
    7. Lucian Arye Bebchuk, 1984. "Litigation and Settlement under Imperfect Information," RAND Journal of Economics, The RAND Corporation, vol. 15(3), pages 404-415, Autumn.
    8. Thomson, William, 2003. "Axiomatic and game-theoretic analysis of bankruptcy and taxation problems: a survey," Mathematical Social Sciences, Elsevier, vol. 45(3), pages 249-297, July.
    9. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-291, March.
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    Citations

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    Cited by:

    1. Andrea Gallice, 2012. "Strategic Announcements of Reference Points in Disputes and Litigations," Working papers 003, Department of Economics and Statistics (Dipartimento di Scienze Economico-Sociali e Matematico-Statistiche), University of Torino.
    2. Yusuke Mori, 2013. "A Formal Behavioral Model of Firm Boundaries: Why Does Authority Relation Mitigate Ex Post Adaptation Problems?," ISER Discussion Paper 0863, Institute of Social and Economic Research, Osaka University.
    3. Mori, Yusuke, 2012. "How Can Integration Reduce Inefficiencies Due to Ex Post Adaptation?," Working Paper Series 142, Center for Japanese Business Studies (HJBS), Graduate School of Commerce and Management Hitotsubashi University.

    More about this item

    Keywords

    self-serving bias; reference dependent preferences; litigation; trial vs settlement; bankruptcy problem; optimal allocation;

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • K41 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Litigation Process
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement

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