Reference-dependent preferences: rationality, mechanism and welfare implications

Raphaël Giraud

Cahiers de la Maison des Sciences Economiques from Université Panthéon-Sorbonne (Paris 1)

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

Keywords: Reference-dependent preferences; status quo; rationality; welfare ordering; reference point shifting; implicit criteria; partial orders (search for similar items in EconPapers)
JEL-codes: A12 D00 D81 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2004-09
New Economics Papers: this item is included in nep-dcm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:mse:wpsorb:v04087

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