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The Behavior of Others as a Reference Point

Author

Listed:
  • Francesco Bogliacino

    (Universidad Nacional de Colombia)

  • Pietro Ortoleva

    (Columbia University)

Abstract

We study a model in which consumers are reference-dependent, modeled using prospect-theory, and their reference point is the average behavior of the society in that period. We show that in any of the equilibria of the economy after a finite number of periods the wealth distribution will become, and remain, either of perfect equality, or admit a ‘missing class’ (a particular form of polarization). We then study growth rates and show that, if we look at the equilibria with the highest growth, then the society with the highest growth rate is the one that starts with perfect equality. If we look at the equilibria with the lowest growth, however, then the society with a small amount of initial inequality is the one that attains the highest growth rate, while a society with perfect equality is the one with the lowest performance. All of these growth rates are weakly higher than the growth rate of a corresponding economy without reference-dependence.

Suggested Citation

  • Francesco Bogliacino & Pietro Ortoleva, 2014. "The Behavior of Others as a Reference Point," Working Papers 2014-4, Princeton University. Economics Department..
    • Handle: RePEc:pri:econom:2014-4
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    References listed on IDEAS

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    1. Spiegler, Ran, 2014. "Bounded Rationality and Industrial Organization," OUP Catalogue, Oxford University Press, number 9780199334261, Decembrie.
    2. Stiglitz, Joseph E, 1969. "Distribution of Income and Wealth among Individuals," Econometrica, Econometric Society, vol. 37(3), pages 382-397, July.
    3. Oded Stark, 2006. "Status Aspirations, Wealth Inequality, and Economic Growth," Review of Development Economics, Wiley Blackwell, vol. 10(1), pages 171-176, February.
    4. Matthew Rabin, 2002. "Inference by Believers in the Law of Small Numbers," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(3), pages 775-816.
    5. Ortoleva, Pietro, 2010. "Status quo bias, multiple priors and uncertainty aversion," Games and Economic Behavior, Elsevier, vol. 69(2), pages 411-424, July.
    6. Samuelson, William & Zeckhauser, Richard, 1988. "Status Quo Bias in Decision Making," Journal of Risk and Uncertainty, Springer, vol. 1(1), pages 7-59, March.
    7. Michael Rauscher, 1997. "Conspicuous consumption, economic growth, and taxation," Journal of Economics, Springer, vol. 66(1), pages 35-42, February.
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    Citations

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    Cited by:

    1. Martini, Christina & Ibañez Diaz, Marcela & Khadjavi, Menusch, 2021. "Community Aspirations and Collective Action," GlobalFood Discussion Papers 309651, Georg-August-Universitaet Goettingen, GlobalFood, Department of Agricultural Economics and Rural Development.
    2. Bramoullé, Y. & Ghiglino, C., 2024. "Status Consumption in Networks: A Reference Dependent Approach," Cambridge Working Papers in Economics 2414, Faculty of Economics, University of Cambridge.
    3. Bogliacino, Francesco & Codagnone, Cristiano, 2021. "Microfoundations, behaviour, and evolution: Evidence from experiments," Structural Change and Economic Dynamics, Elsevier, vol. 56(C), pages 372-385.
    4. Paula Carrasco & Rodrigo Ceni & Ivone Perazzo & Gonzalo Salas, 2021. "Are Not Any Silver Linings in the Cloud? Subjective Well-being Among Deprived Young People," Journal of Happiness Studies, Springer, vol. 22(2), pages 491-516, February.
    5. Bramoullé, Y. & Ghiglino, C., 2024. "Status Consumption in Networks: A Reference Dependent Approach," Janeway Institute Working Papers 2409, Faculty of Economics, University of Cambridge.
    6. Ross, Phillip H., 2019. "Occupation aspirations, education investment, and cognitive outcomes: Evidence from Indian adolescents," World Development, Elsevier, vol. 123(C), pages 1-1.
    7. Antonio Filippin & Luca Nunziata, 2019. "Monetary effects of inequality: lessons from the euro experiment," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 17(2), pages 99-124, June.
    8. Francesco Bogliacino & Laura Jiménez & Gianluca Grimalda, 2015. "Consultative, Democracy and Trust," Documentos de Trabajo, Escuela de Economía 12696, Universidad Nacional de Colombia, FCE, CID.
    9. Camacho, Carmen & Harmankaya, Fatih & Sağlam, Çağrı, 2020. "Social status pursuit, distribution of bequests and inequality," Economic Modelling, Elsevier, vol. 86(C), pages 183-191.
    10. Paula Carrasco & Rodrigo Ceni & Ivonne Perazzo & Gonzalo Salas, 2019. "Are not any silver in the cloud? Subjective well-being among deprived young people," Documentos de Trabajo (working papers) 19-09, Instituto de Economía - IECON.
    11. González-Jiménez, Víctor, 2022. "Social status and motivated beliefs," Journal of Public Economics, Elsevier, vol. 211(C).
    12. Bogliacino, Francesco & Jiménez Lozano, Laura & Grimalda, Gianluca, 2018. "Consultative democracy and trust11We thank Vanessa Carrillo, Jairo Paéz and Daniel Reyes for their help during the experiments. A special thanks to Franci Beltrán, Jairo Paéz and Alfonso Peña for prov," Structural Change and Economic Dynamics, Elsevier, vol. 44(C), pages 55-67.
    13. Bogliacino, Francesco & Grimalda, Gianluca & Jimenez, Laura, 2017. "Consultative Democracy & Trust," MPRA Paper 82138, University Library of Munich, Germany.
    14. Fatas, Enrique & Restrepo-Plaza, Lina, 2022. "When losses can be a gain. A large lab-in-the-field experiment on reference dependent forgiveness in Colombia," Journal of Economic Psychology, Elsevier, vol. 88(C).

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    More about this item

    Keywords

    Prospect Theory; Reference-dependence; Aspirations;
    All these keywords.

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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