A canonical model of choice with initial endowments

Yusufcan Masatlioglu, Efe A. Ok

    Research output: Contribution to journalArticlepeer-review

    Abstract

    We use the revealed preference method to derive a model of individual decision making when the endowment of an agent provides a reference point that may influence her choices. This model generalizes the classical rational choice model, which views choice as a consequence of "utility maximization". Instead, our model sees choice as arising from "psychologically constrained utility maximization", where the constraints are induced by one's initial endowment. In particular, this model produces status quo bias as a natural consequence (but not necessarily the endowment effect). A range of economic applications identify the predictive and explanatory strength of the model. In particular, we demonstrate that the status quo bias phenomenon reduces the size of the substitution effect in problems of consumption choice.

    Original languageEnglish (US)
    Article numberrdt037
    Pages (from-to)851-883
    Number of pages33
    JournalReview of Economic Studies
    Volume81
    Issue number2
    DOIs
    StatePublished - Jul 2013

    Keywords

    • Consumer demand
    • Endowment effect
    • Incomplete preferences
    • Procedural choice
    • Status quo bias

    ASJC Scopus subject areas

    • Economics and Econometrics

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