Endogenous Preferences and Welfare Evaluations

Abstract

Economists and scholars in law and economics typically assume that preferences are exogenous; that is, that the policies being considered will not change the preferences of economic actors. This assumption is wrong for many policies that law and economics scholars study. This essay examines some of the consequences for normative analysis if we instead assume that preferences are endogenous. It describes some of the puzzles that occur, and classifies them in two categories: adaptive preferences, and maladaptive preferences. Adaptive preferences occur as people adapt to the status quo in ways that call into question whether we should really honor their preferences - doing so may justify a status quo that is quite problematic. Maladaptive preferences occur as people fail to correctly predict and adapt to the environment, thereby hurting themselves. There are a variety of partial responses to these puzzles that we can use within the welfare economics tradition. Some possible responses include: Pareto self-improvements, no-regret improvements, scrubbed-up preferences, Becker's approach to utility functions, and constrained efficiency. None of these concepts on its own fully solves our problems. Indeed, even collectively they fall short. Still, these concepts help. They allow us to analyze pragmatically in many circumstances where the puzzles of endogenous preferences arise.

Keywords: endogenous preferences, welfare, adapative preferences, maladaptive preferences, Pareto self-improvement

JEL Classification: D60, K00