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Social Preferences and Competition

  • Schmidt, Klaus M.

There is a general presumption that social preferences can be ignored if markets are competitive. Market experiments (Smith 1962) and recent theoretical results (Dufwenberg et al. 2008) suggest that competition forces people to behave as if they were purely self-interested. We qualify this view. Social preferences are irrelevant if and only if two conditions are met: separability of preferences and completeness of contracts. These conditions are often plausible, but they fail to hold when uncertainty is important (financial markets) or when incomplete contracts are traded (labor markets). Social preferences can explain many of the anomalies frequently observed on these markets.

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Paper provided by University of Munich, Department of Economics in its series Discussion Papers in Economics with number 11313.

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Date of creation: Jan 2010
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Handle: RePEc:lmu:muenec:11313
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