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Meaningful Theorems: Nonparametric Analysis of Reference-dependent Preferences

Laura Blow,Vincent P. Crawford

Published 2023 in Social Science Research Network

ABSTRACT

We derive nonparametric sufficient and asymptotically necessary conditions for the existence of reference-dependent preferences, as in Kőszegi and Rabin’s (2006) structural implementation of Kahneman and Tversky’s (1979) prospect theory, that can rationalize some consumer demand choices that violate the conditions for a neoclassical rationalization. Our conditions relax Kőszegi and Rabin’s and others’ assumption of additive separability across goods. Unless prospect theory’s notion of sensitivity is constant and reference points are precisely modelable or observable, the hypothesis of reference-dependent preferences has few or no nonparametrically refutable implications. But with constant sensitivity and modelable reference points, the model has useful implications. For almost all of Farber’s (2005, 2008) cabdrivers, models that relax additive separability across goods have higher measures of predictive success (Selten and Krischker 1983) than their additively separable counterparts. For roughly half of the drivers, reference-dependent models that relax additive separability have higher Selten measures than their neoclassical counterparts.

PUBLICATION RECORD

  • Publication year

    2023

  • Venue

    Social Science Research Network

  • Publication date

    Unknown publication date

  • Fields of study

    Not labeled

  • Identifiers
    DOI 10.2139/ssrn.4645210
  • External record

    Open on Semantic Scholar

  • Source metadata

    Semantic Scholar

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