Working Paper: CEPR ID: DP6815
Authors: Martin Dufwenberg; Paul Heidhues; Georg Kirchsteiger; Frank Riedel; Joel Sobel
Abstract: We study competitive market outcomes in economies where agents have other-regarding preferences. We identify a separability condition on monotone preferences that is necessary and sufficient for one's own demand to be independent of the allocations and characteristics of other agents in the economy. Given separability, it is impossible to identify other-regarding preferences from market behaviour: agents behave as if they had classical preferences that depend only on own consumption in competitive equilibrium. If preferences, in addition, depend only on the final allocation of consumption in society, the Second Welfare Theorem holds as long as an increase in resources can be distributed such that all agents are better off. Nevertheless, the First Welfare Theorem generally does not hold. Allowing agents to care about their own consumption and the distribution of consumption possibilities in the economy, we provide a condition under which agents have no incentive to make direct transfers, and show that this condition implies that competitive equilibria are efficient given prices.
Keywords: markets; other-regarding preferences; self-interest; welfare
JEL Codes: D5; D63; D64
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| separable preferences (D10) | classical preferences (D11) |
| separable preferences (D10) | demand function independent of others' consumption choices (D10) |
| ORP (O30) | inefficiencies in competitive equilibria (D59) |
| separability condition (D10) | classical demand behavior (D12) |
| RLP (R50) | efficiency of equilibria (D50) |
| ORP (O30) | limitations on market efficiency (G14) |
| separability condition (D10) | competitive equilibria coincide with classical economies (D50) |