Some Social Welfare Implications of Behavioural Preferences

Andrea Gallice

No 6572, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We investigate how the assumption that individuals are characterized by some recent forms of behavioural preferences changes the analysis of an otherwise classical welfare problem, namely the optimal allocation of a scarce resource among a finite number of claimants. We consider two preference specifications: inequity aversion and reference dependence. In the latter case we also study the implications of the claimants displaying a self-serving bias when setting their reference point. Using standard welfare criteria, we compute the optimal allocations that a benevolent social planner should implement in the various scenarios. Results are often remarkably different with respect to traditional (i.e., rational preferences) analysis. We discuss the policy implications and the role of a social planner.

Keywords: Social welfare; Optimum allocation; Inequity aversion; Reference dependence; Self-serving bias (search for similar items in EconPapers)
JEL-codes: D01 D61 (search for similar items in EconPapers)
Date: 2007-11
New Economics Papers: this item is included in nep-evo and nep-upt
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