The Behavior of Others as a Reference Point

29 Pages Posted: 11 Jul 2013

See all articles by Francesco Bogliacino

Francesco Bogliacino

National University of Colombia - Department of Economics

Pietro Ortoleva

Princeton University - Department of Economics

Date Written: April 2013

Abstract

We study a model in which consumers are reference-dependent, modeled using prospect-theory, and their reference point is the average behavior of the society in that period. We show that in any of the equilibria of the economy after a finite number of periods the wealth distribution will become, and remain, either of perfect equality, or admit a missing class, a particular form of polarization between the rich and the poor. We then study growth rates and show that, if we look at the equilibria with the highest growth, then the society with the highest growth rate is the one that starts with perfect equality. If we look at the equilibria with the lowest growth, however, then the society with a small amount of initial inequality is the one that attains the highest growth rate, while a society with perfect equality is the one with the lowest performance. All of these growth rates are weakly higher than the growth rate of a corresponding economy without reference-dependence.

Keywords: Prospect Theory, Reference-dependence, Aspirations

JEL Classification: D11, D91

Suggested Citation

Bogliacino, Francesco and Ortoleva, Pietro, The Behavior of Others as a Reference Point (April 2013). Columbia Business School Research Paper No. 13-55, Available at SSRN: https://ssrn.com/abstract=2292011 or http://dx.doi.org/10.2139/ssrn.2292011

Francesco Bogliacino

National University of Colombia - Department of Economics ( email )

Carrera 30 Calle 45 Ciudad Universitaria
Bogotá
Colombia

Pietro Ortoleva (Contact Author)

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

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