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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: D81 D00 A12 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2004-09
New Economics Papers: this item is included in nep-dcm
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