The Behavior of Other as a Reference Point

41 Pages Posted: 2 Sep 2015

See all articles by Francesco Bogliacino

Francesco Bogliacino

National University of Colombia - Department of Economics

Pietro Ortoleva

Princeton University - Department of Economics

Date Written: August 26, 2015

Abstract

We use prospect theory to model reference dependent consumers, where the reference point is the average behavior of the society in the current period. We show that after a finite number of steps under any equilibrium, the distribution of wealth will become and remain equal, or admit a missing class (a particular form of polarization). Under equilibria that admit the highest growth rates, the initial wealth distribution that maximizes this growth rate is one of perfect equality. Conversely, under equilibria that admit the lowest growth rates, perfect equality minimizes this growth rate and societies with a small level of initial inequality grow the fastest. In addition growth rates in corresponding economics without reference dependent consumers admit lower growth rates.

Keywords: Prospect Theory, Reference-dependence, Aspirations

JEL Classification: D11; D91

Suggested Citation

Bogliacino, Francesco and Ortoleva, Pietro, The Behavior of Other as a Reference Point (August 26, 2015). Available at SSRN: https://ssrn.com/abstract=2653343 or http://dx.doi.org/10.2139/ssrn.2653343

Francesco Bogliacino

National University of Colombia - Department of Economics ( email )

Carrera 30 Calle 45 Ciudad Universitaria
Bogotá
Colombia

Pietro Ortoleva

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

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