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Dominance Concepts for Fehr-Schmidt Preferences

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  • Sanjit Dhami
  • Ali al-Nowaihi

Abstract

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.

Suggested Citation

  • Sanjit Dhami & Ali al-Nowaihi, 2013. "Dominance Concepts for Fehr-Schmidt Preferences," Discussion Papers in Economics 13/09, Division of Economics, School of Business, University of Leicester.
    • Handle: RePEc:lec:leecon:13/09
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    More about this item

    Keywords

    Fehr-Schmidt Preferences; …First Order Fehr-Schmidt Dominance; Second Order Fehr-Schmidt Dominance; Weak Fehr-Schmidt Dominance; Strong Fehr-Schmidt Dominance; Fehr-Schmidt-Lorenz Dominance.;
    All these keywords.

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • D64 - Microeconomics - - Welfare Economics - - - Altruism; Philanthropy; Intergenerational Transfers

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