We demonstrate that a simple model, constructed on the premise that people are motivated by both their pecuniary payoff and their relative payoff standing, organizes a large and seemingly disparate set of laboratory observations as one consistent pattern The model is incomplete information but nevertheless posed entirely in terms of directly observable variables The model explains observations from games where equity is thought to be a factor, such as ultimatum and dictator, games where reciprocity is thought to play a role, such as the prisoner's dilemma and gift exchange, and games where competitive behavior is observed, such as Bertrand markets (JEL C78, C90, D63, D64, H41)

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ERC: A Theory of Equity, Reciprocity, and Competition

In the Hamadryas baboon, males are substantially larger than females. A troop of baboons is subdivided into a number of ‘one-male groups’, consisting of one adult male and one or more females with their young. The male prevents any of ‘his’ females from moving too far from him. Kummer (1971) performed the following experiment. Two males, A and B, previously unknown to each other, were placed in a large enclosure. Male A was free to move about the enclosure, but male B was shut in a small cage, from which he could observe A but not interfere. A female, unknown to both males, was then placed in the enclosure. Within 20 minutes male A had persuaded the female to accept his ownership. Male B was then released into the open enclosure. Instead of challenging male A , B avoided any contact, accepting A’s ownership.

Evolution and the Theory of Games

We develop a model of reference-dependent preferences and loss aversion where “gain‐loss utility” is derived from standard “consumption utility” and the reference point is determined endogenously by the economic environment. We assume that a person’s reference point is her rational expectations held in the recent past about outcomes, which are determined in a personal equilibrium by the requirement that they must be consistent with optimal behavior given expectations. In deterministic environments, choices maximize consumption utility, but gain‐loss utility influences behavior when there is uncertainty. Applying the model to consumer behavior, we show that willingness to pay for a good is increasing in the expected probability of purchase and in the expected prices conditional on purchase. In within-day labor-supply decisions, a worker is less likely to continue work if income earned thus far is unexpectedly high, but more likely to show up as well as continue work if expected income is high.

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A Model of Reference-Dependent Preferences

We develop a model that fleshes out, extends, and modifies existing models of reference dependent preferences and loss aversion while accomodating most of the evidence motivating these models. Our approach makes reference-dependent theory more broadly applicable by avoiding some of the ways that prevailing modelsâ€”if applied literally and without ancillary assumptionsâ€”make variously weak and incorrect predictions. Our model combines the reference-dependent gain-loss utility with standard economic â€œconsumption utilityâ€ and clarifies the relationship between the two. Most importantly, we posit that a personâ€™s reference point is her recent expectations about outcomes (rather than the status quo), and assume that behavior accords to a personal equilibrium: The person maximizes utility given her rational expectations about outcomes, where these expectations depend on her own anticipated behavior. We apply our theory to consumer behavior, and emphasize that a consumerâ€™s willingness to pay for a good is endogenously determined by the market distribution of prices and how she expects to respond to these prices. Because a buyerâ€™s willingness to buy depends on whether she anticipates buying the good, for a range of market prices there are multiple personal equilibria. This multiplicity disappears when the consumer is sufficiently uncertain about the price she will face. Because paying more than she anticipated induces a sense of loss in the buyer, the lower the prices at which she expects to buy the lower will be her willingness to pay. In some situations, a known stochastic decrease in prices can even lower the quantity demanded.

We use administrative records on the incomes of more than 40 million children and their parents to describe three features of intergenerational mobility in the United States. First, we characterize the joint distribution of parent and child income at the national level. The conditional expectation of child income given parent income is linear in percentile ranks. On average, a 10 percentile increase in parent income is associated with a 3.4 percentile increase in a child’s income. Second, intergenerational mobility varies substantially across areas within the U.S. For example, the probability that a child reaches the top quintile of the national income distribution starting from a family in the bottom quintile is 4.4% in Charlotte but 12.9% in San Jose. Third, we explore the factors correlated with upward mobility. High mobility areas have (1) less residential segregation, (2) less income inequality, (3) better primary schools, (4) greater social capital, and (5) greater family stability. While our descriptive analysis does not identify the causal mechanisms that determine upward mobility, the publicly available statistics on intergenerational mobility developed here can facilitate research on such mechanisms. The opinions expressed in this paper are those of the authors alone and do not necessarily reect

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Where is the Land of Opportunity? The Geography of Intergenerational Mobility in the United States*

Even relatively poor people oppose high rates of redistribution because of the anticipation that they or their children may move up the income ladder. This hypothesis commonly advanced as an explanation of why most democracies do not engage in large-scale expropriation and highly progressive redistribution. But is it compatible with everyone -- especially the poor -- holding rational expectations that not everyone can simultaneously expect to end up richer than average? This paper establishes the formal basis for the POUM hypothesis. There is a range of incomes below the mean where agents oppose lasting redistributions if (and, in a sense, only if) tomorrow's expected income is increasing and concave in today's income. The laissez-faire coalition is larger, the more concave the transition function and the longer the policy horizon. We illustrate the general analysis with an example (calibrated to the U.S.) where, in every period, 3/4 of families are poorer than average, yet a 2/3 majority has expected future incomes above the mean, and therefore desires low tax rates for all future generations. We also analyze empirical mobility matrices from the PSID and find that the POUM effect is indeed a significant feature of the data.

Social Mobility and the Demand for Redistribution: the Poum Hypothesis

This paper examines the often stated idea that the poor do not support high levels of redistribution because of the hope that they, or their offspring, may make it up the income ladder. This “ prospect of upward mobility” (POUM) hypothesis is shown to be fully compatible with rational expectations, and fundamentally linked to concavity in the mobility process. A steady-state majority could even be simultaneously poorer than average in terms of current income, and richer than average in terms of expected future incomes. A e rst empirical assessment suggests, on the other hand, that in recent U. S. data the POUM effect is probably dominated by the demand for social insurance. “ In the future, everyone will be world-famous for e fteen minutes” [Andy Warhol 1968].

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Social Mobility and the Demand for Redistribution: The Poum Hypothesis

http://www2.um.edu.uy/dubraj/documentos/EU%20without%20completeness.pdf

Expected utility theory without the completeness axiom

https://www.econ.ucdavis.edu/faculty/nehring/teaching/econ203/readings/matsaioglu-ok-status-quo-bias-04.pdf

Rational choice with status quo bias

Evaluation of distributions of income on the basis of equality is one of the most extensively studied topics in the general field of welfare economics. There is thus an enormous body of work devoted exclusively to the problem of the measurement of welfare and income inequality experienced by a given society.2 However, the majority of these studies are conducted in static terms, where the so-called “snapshots” of the income distributions are taken as the primitives of the analysis. Nevertheless, static evaluations of income distributions can provide only an incomplete picture, for, in most instances, the social welfare would certainly depend on the dynamics of income distribution as well.3 This basic insight, along with the increased availability of longitudinal data sets, has led to a massive and rapidly expanding literature on the measurement of income mobility. This chapter surveys the highlights of this literature.

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Efe A. Ok

Papers

Social Mobility and the Demand for Redistribution: the Poum Hypothesis

Social Mobility and the Demand for Redistribution: The Poum Hypothesis

Expected utility theory without the completeness axiom

Rational choice with status quo bias

The Measurement of Income Mobility: An Introduction to the Literature