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The Welfare Economics of Reference Dependence

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  • Reck, Daniel
  • Seibold, Arthur

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.

Suggested Citation

  • Reck, Daniel & Seibold, Arthur, 2021. "The Welfare Economics of Reference Dependence," CEPR Discussion Papers 16560, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:16560
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    More about this item

    Keywords

    Reference dependence; Behavioral welfare economics; Public pensions;
    All these keywords.

    JEL classification:

    • D60 - Microeconomics - - Welfare Economics - - - General
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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