nep-dcm New Economics Papers
on Discrete Choice Models
Issue of 2005‒03‒13
one paper chosen by
Philip Yu
Hong Kong University

  1. Reference-dependent preferences : rationality, mechanism and welfare implications By Raphaël Giraud

  1. By: Raphaël Giraud (EUREQua/TEAM)
    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
    JEL: D81 D00 A12
    Date: 2004–09

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