Axiomatic reference-dependence in behavior toward others and toward risk

Axiomatic reference-dependence in behavior toward others and toward risk

http://www.springerlink.com/content/q5523605771w6163/fulltext.pdf

Journal Economic Theory
Publisher Springer Berlin / Heidelberg
ISSN 0938-2259 (Print) 1432-0479 (Online)
Issue Volume 28, Number 3 / August, 2006
Category Research Article
DOI 10.1007/s00199-005-0643-4
Pages 681-692

William S. Neilson1

(1) Department of Economics, Texas A&M University, College Station, TX 77843-4228, USA

Summary. This paper considers the applicability of the standard separability axiom for both risk and other-regarding preferences, and advances arguments why separability might fail. An alternative axiom, which is immune to these arguments, leads to a preference representation that is additively separable in a reference variable and the differences between the other variables and the reference variable. For other-regarding preferences the reference variable is the decision-maker’s own payoff, and the resulting representation coincides with the Fehr-Schmidt model. For risk preferences the reference variable is initial wealth, and the resulting representation is a generalization of prospect theory.
Keywords and Phrases: Other-regarding preferences - Risk - Separability - Axiomatic foundation - Prospect theory.

Received: 28 April 2004, Revised: 27 April 2005,
JEL Classification Numbers: D81, D64.