Working Paper: CEPR ID: DP16560
Authors: Daniel Reck; Arthur Seibold
Abstract: Empirical evidence suggests individuals often evaluate options relative to a reference point, especially seeking to avoid losses. We analyze welfare under reference dependence. We describe how welfare effects of policies depend on normative judgments about whether reference dependence reflects a bias or normative preference. Lowering reference points generally improves welfare, absent countervailing externalities or biases. Conversely, welfare effects of price changes depend strongly on normative judgments. We apply our theory to reference dependence exhibited in German workers’ retirement decisions. Our results suggest positive welfare effects of increasing the Normal Retirement Age but ambiguous effects of financial incentives to postpone retirement.
Keywords: reference dependence; behavioral welfare economics; public pensions
JEL Codes: D60; D90; H55
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| lowering reference points (E52) | welfare (I38) |
| price changes (P22) | welfare (I38) |
| lowering reference points (normative) (D63) | smaller losses (G33) |
| lowering reference points (non-normative) (Y20) | overconsumption (E21) |
| price increase (bias) (E31) | welfare (I38) |
| increasing normal retirement age (J26) | positive welfare effects (D60) |
| financial incentives to postpone retirement (J26) | ambiguous effects (D91) |