Reference-Dependent Reservation Utility and the Comparison Discount

16 Pages Posted: 7 Dec 2013 Last revised: 11 Feb 2014

Date Written: February 10, 2014

Abstract

This paper investigates how a risk averse and loss averse agent having reference-dependent reservation utility, affects the cost to the principal when the agent also has reference-dependent preferences. The main finding is that, under these circumstances, if the agent compares his outside alternative to the principal's offer, the principal pays less – a comparison discount – relative to the cost when reservation utility is not reference-dependent.

Keywords: principal-agent, reservation utility, reference-dependent preferences, comparison effect, contrast principle

JEL Classification: D82, D84, M12, M52

Suggested Citation

Pierre, Norbert, Reference-Dependent Reservation Utility and the Comparison Discount (February 10, 2014). Available at SSRN: https://ssrn.com/abstract=2364443 or http://dx.doi.org/10.2139/ssrn.2364443

Norbert Pierre (Contact Author)

Independent ( email )

United States
917-854-3730 (Phone)

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