Summary.
This paper considers the applicability of the standard separability axiom for both risk and other-regarding preferences, and advances arguments why separability might fail. An alternative axiom, which is immune to these arguments, leads to a preference representation that is additively separable in a reference variable and the differences between the other variables and the reference variable. For other-regarding preferences the reference variable is the decision-maker’s own payoff, and the resulting representation coincides with the Fehr-Schmidt model. For risk preferences the reference variable is initial wealth, and the resulting representation is a generalization of prospect theory.
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Received: 28 April 2004, Revised: 27 April 2005,
JEL Classification Numbers:
D81, D64.
An earlier version of this paper was titled “An Axiomatic Characterization of the Fehr-Schmidt Model of Inequity Aversion.” I am grateful to Rachel Croson, Jill Stowe, and Karl Vind for helpful comments. Financial support was provided by the Private Enterprise Research Center, the Program in the Economics of Public Policy, and the Program to Enhance Scholarly and Creative Activities.
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Neilson, W.S. Axiomatic reference-dependence in behavior toward others and toward risk. Economic Theory 28, 681–692 (2006). https://doi.org/10.1007/s00199-005-0643-4
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DOI: https://doi.org/10.1007/s00199-005-0643-4