Abstract
We study the behavioural foundation of interdependent preferences, where the outcomes of others affect the welfare of the decision maker. These preferences are taken as given, not derived from more primitive ones. Our aim is to establish an axiomatic foundation providing the link between observation of choices and a functional representation which is convenient, free of inconsistencies and can provide the basis for measurement. The dependence among preferences may take place in two conceptually different ways, expressing two different views of the nature of interdependent preferences. The first is Festinger's view that the evaluation of peers' outcomes is useful to improve individual choices by learning from the comparison. The second is Veblen's view that interdependent preferences keep track of social status derived from a social value attributed to the goods one consumes. Corresponding to these two different views, we have two different formulations. In the first, the decision maker values his outcomes and those of others on the basis of his own utility. In the second, he ranks outcomes according to a social value function. We give different axiomatic foundations to these two different, but complementary, views of the nature of the interdependence. On the basis of this axiomatic foundation, we build a behavioural theory of comparative statics within subjects and across subjects. We characterize preferences according to the relative importance assigned to gains and losses in social domain, that is pride and envy. This parallels the standard analysis of private gains and losses (as well as that of regret and relief). We give an axiomatic foundation of interpersonal comparison of preferences, ordering individuals according to their sensitivity to social ranking. These characterizations provide the behavioural foundation for applied analysis of market and game equilibria with interdependent preferences.
| Original language | English (US) |
|---|---|
| Article number | rds006 |
| Pages (from-to) | 1591-1636 |
| Number of pages | 46 |
| Journal | Review of Economic Studies |
| Volume | 79 |
| Issue number | 4 |
| DOIs | |
| State | Published - Oct 2012 |
Bibliographical note
Funding Information:Acknowledgment. Part of this research was done while the first two authors were visiting the Department of Economics of Boston University, which they thank for its hospitality. We thank Michele Boldrin, Giulia Brancaccio, Simone Cerreia-Vioglio, Larry Epstein, Chaim Fershtman, Enrico Minelli, Andrew Oswald, and especially Bart Lipman, Andrew Postlewaite, and Todd Sarver for some very useful discussions, as well as seminar audiences at the Risk, Uncertainty and Decision workshop (Tel Aviv), the Foundations of Utility and Risk workshop (Barcelona), Boston University, Brescia, City University London, Cornell, Essex, Leicester, Michigan, Northwestern, Oxford, Paris Dauphine, the Swiss Finance Institute (Lausanne), Toulouse, Warwick, and Zurich. We also thank three anonymous referees and the editor Bruno Biais for comments and criticisms that helped to improve the form and substance of the paper. The authors gratefully acknowledge the financial support of the European Research Council (advanced grant, BRSCDP-TEA) and of the National Science Foundation (SES 0924896).
Keywords
- Envy
- External habit
- Keeping up with the Joneses
- Pride
- Regret
- Status