Microeconomics Seminar - Vincent Crawford

Title: "Meaningful Theorems: Nonparametric Analysis of Reference-Dependent Preferences" with Laura Blow

Abstract: This paper derives nonparametric conditions for the existence of reference-dependent preferences that rationalize a price-taking consumer’s demand behavior. Unless reference points are modelable and sensitivity is constant, reference-dependent models of consumer demand are flexible enough to fit virtually any data. Assuming modelable reference points and constant sensitivity, we characterize continuous reference-dependent preferences, relaxing Kőszegi and Rabin’s (2006; “KR”) strong functional-structure assumptions. We use our characterization to re-analyze Farber’s (2005, 2008) data on cabdrivers’ labor supply. Relaxing KR’s assumptions greatly increases Selten’s (1991) measure of predictive success. For many drivers, a relaxed reference-dependent model has greater success than its neoclassical counterpart.