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Social Preferences and Competition

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  • Schmidt, Klaus M.

Abstract

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.

Suggested Citation

  • Schmidt, Klaus M., 2009. "Social Preferences and Competition," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 298, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    • Handle: RePEc:trf:wpaper:298
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    9. Arnaud Z. Dragicevic, 2021. "Emergence and Dynamics of Short Food Supply Chains," Networks and Spatial Economics, Springer, vol. 21(1), pages 31-55, March.
    10. Bental, Benjamin & Kragl, Jenny, 2021. "Inequality and incentives with societal other-regarding preferences," Journal of Economic Behavior & Organization, Elsevier, vol. 188(C), pages 1298-1324.
    11. Paul Gortner & Joël van der Weele, "undated". "Peer Effects and Risk Sharing in Experimental Asset Markets," Tinbergen Institute Discussion Papers 19-027/I, Tinbergen Institute.
    12. Nicholas, Aaron, 2022. "Invisible Hand, invisible morals: An experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 197(C), pages 395-418.
    13. Baghestanian, Sascha & Gortner, Paul J. & van der Weele, Joël J., 2015. "Peer effects and risk sharing in experimental asset markets," SAFE Working Paper Series 67, Leibniz Institute for Financial Research SAFE, revised 2015.
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    More about this item

    Keywords

    Social preferences; competition; separability; incomplete contracts; asset markets; labor markets;
    All these keywords.

    JEL classification:

    • C9 - Mathematical and Quantitative Methods - - Design of Experiments
    • D5 - Microeconomics - - General Equilibrium and Disequilibrium
    • J0 - Labor and Demographic Economics - - General

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