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Dominance Concepts for Fehr-Schmidt Preferences

  • Sanjit Dhami
  • Ali al-Nowaihi

Many diverse problems in economics can only be reasonably explained by assuming that people have social preferences, i.e., in addition to their own payoffs they are altruistic towards those who are poorer and envious towards those who are richer. How do people with social preferences choose among alternative income distributions? The aim of our paper is to answer this question in the context of the Fehr-Schmidt (1999) preferences. The classical notions of first and second order stochastic dominance are not useful in this case. However, a fairly natural set of conditions that are a modification of the concepts of first and second order stochastic dominance and generalized Lorenz dominance turn out to successfully answer the question posed. We also introduce weak FS dominance, which is particularly suited to the linear form of Fehr-Schmidt preferences.

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Paper provided by Department of Economics, University of Leicester in its series Discussion Papers in Economics with number 13/09.

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Date of creation: May 2013
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Handle: RePEc:lec:leecon:13/09
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