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Reference-dependent preferences: rationality, mechanism and welfare implications

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Abstract

In this paper, we ask three questions about reference-dependent preferences (RDP): to what extent can they be said to be irrational? What is the mechanism that underlies reference dependence? How to design welfare improving policies when preferences are reference-dependent? As to the first question, we characterize three notions of rationality to assess the rationality of RDP and show that there is a sense in which they are rational. As to the second, we show that the effect of a shifting reference point is two-sided: first modifying the relevant criteria for choice and second modifying the desirability of an option. As to the third question we define a welfare ordering based on the comparison of the strength of the status quo bias and show how to relate it to the representation of preferences

Suggested Citation

  • Raphaël Giraud, 2004. "Reference-dependent preferences: rationality, mechanism and welfare implications," Cahiers de la Maison des Sciences Economiques v04087, Université Panthéon-Sorbonne (Paris 1).
    • Handle: RePEc:mse:wpsorb:v04087
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    Cited by:

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    2. Luc, Dinh The & Soubeyran, Antoine, 2013. "Variable preference relations: Existence of maximal elements," Journal of Mathematical Economics, Elsevier, vol. 49(4), pages 251-262.
    3. Juan Sebastián Lleras & Evan Piermont & Richard Svoboda, 2019. "Asymmetric gain–loss reference dependence and attitudes toward uncertainty," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 68(3), pages 669-699, October.

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    More about this item

    Keywords

    Reference-dependent preferences; status quo; rationality; welfare ordering; reference point shifting; implicit criteria; partial orders;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D00 - Microeconomics - - General - - - General
    • A12 - General Economics and Teaching - - General Economics - - - Relation of Economics to Other Disciplines

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