A Model of Reference-Dependent Preferences

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ID: 291020
2006
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Abstract
We develop a model of reference-dependent preferences and loss aversion where “gain-loss utility” is derived from standard “consumption utility” and the reference point is determined endogenously by the economic environment. We assume that a person's reference point is her rational expectations held in the recent past about outcomes, which are determined in a personal equilibrium by the requirement that they must be consistent with optimal behavior given expectations. In deterministic environments, choices maximize consumption utility, but gain-loss utility influences behavior when there is uncertainty. Applying the model to consumer behavior, we show that willingness to pay for a good is increasing in the expected probability of purchase and in the expected prices conditional on purchase. In within-day labor-supply decisions, a worker is less likely to continue work if income earned thus far is unexpectedly high, but more likely to show up as well as continue work if expected income is high.
Reference Key
openalex_W2113991325 Use this key to autocite in the manuscript while using SciMatic Manuscript Manager or Thesis Manager
Authors Botond Kőszegi, Matthew Rabin
Journal the quarterly journal of economics
Year 2006
DOI
10.1093/qje/121.4.1133
URL
https://doi.org/10.1093/qje/121.4.1133
Keywords Keywords not found

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