Do Social Preferences Matter in Competitive Markets?

Institute of Mathematical Economics Working Paper No. 392

30 Pages Posted: 18 Sep 2007

See all articles by Paul Heidhues

Paul Heidhues

Heinrich Heine University Dusseldorf - Duesseldorf Institute for Competition Economics (DICE)

Frank Riedel

Bielefeld University - Center for Mathematical Economics

Date Written: May 2007

Abstract

Experimental evidence stresses the importance of so-called social preferences for understanding economic behavior. Social preferences are defined over the entire allocation in a given economic environment, and not just over one's own consumption as is traditionally presumed. We study the implications for competitive market outcomes if agents have such preferences. First, we clarify under what conditions an agent behaves as if she was selfish — i.e. when her demand function is independent of others' behavior. An agent behaves as if selfish if and only if her preferences can be represented by a utility function that is separable between her own utility and the allocation of goods for all other agents. Next, we study equilibrium outcomes in economies where individual agents behave as if selfish. We show that one can identify a corresponding ego-economy such that the equilibria of the ego-economy coincide with the equilibria of the original economy. As a consequence, competitive equilibria exist and they are material efficient. In general, however, the First Welfare Theorem fails. We introduce the class of Bergsonian social utility functions, which are social utility functions that are completely separable in all agents' material utility. For such social preferences, the Second Welfare Theorem holds under a suitable growth condition. We also establish that in uncertain environments, agents with social preferences typically do not behave as if selfish. Furthermore, in the presence of public goods, both demand and equilibrium outcomes depend on social preferences.

Keywords: General Equilibrium, Social Preferences, Welfare, Externalities

JEL Classification: D50, D62, D11

Suggested Citation

Heidhues, Paul and Riedel, Frank, Do Social Preferences Matter in Competitive Markets? (May 2007). Institute of Mathematical Economics Working Paper No. 392, Available at SSRN: https://ssrn.com/abstract=1015228 or http://dx.doi.org/10.2139/ssrn.1015228

Paul Heidhues (Contact Author)

Heinrich Heine University Dusseldorf - Duesseldorf Institute for Competition Economics (DICE)

Universitaetsstr. 1
Duesseldorf, NRW 40225
Germany

Frank Riedel

Bielefeld University - Center for Mathematical Economics ( email )

Postfach 10 01 31
Bielefeld, D-33501
Germany

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
96
Abstract Views
961
rank
296,446
PlumX Metrics