DP6572 Some Social Welfare Implications of Behavioural Preferences

Author(s): Andrea Gallice

Publication Date: November 2007

Keyword(s): social welfare , optimum allocation , inequity aversion , reference dependence , self-serving bias

JEL(s): D01 , D61

Programme Areas: Industrial Organization , Public Policy

Link to this Page: www.cepr.org/pubs/dps/DP6572.asp.asp

We investigate how the assumption that individuals are characterized by some recent forms of behavioural preferences changes the analysis of an otherwise classical welfare problem, namely the optimal allocation of a scarce resource among a finite number of claimants. We consider two preference specifications: inequity aversion and reference dependence. In the latter case we also study the implications of the claimants displaying a self-serving bias when setting their reference point. Using standard welfare criteria, we compute the optimal allocations that a benevolent social planner should implement in the various scenarios. Results are often remarkably different with respect to traditional (i.e., rational preferences) analysis. We discuss the policy implications and the role of a social planner.