Affiliation:
1. Faculty of Arts and Social Sciences, Sabancı University (email: )
2. Department of Economics, University of Maryland (email: )
3. Department of Economics, Purdue University (email: )
Abstract
We provide two nested models of random reference-dependent choice in which the reference point is endogenously determined by random processes. Random choice behavior is due to random reference points, even though, from the decision-maker’s viewpoint, choices are deterministic. Through a revealed preference exercise, we establish when and how one can identify the reference-dependent preferences and the random reference rule from observed choice data. We also present behavioral postulates that characterize the empirical content of our models. Lastly, we investigate an application of our model to Bertrand competition with differentiated products. (JEL D11, D91)
Publisher
American Economic Association
Cited by
3 articles.
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1. Bounded Rationality in Choice Theory: A Survey;Journal of Economic Literature;2024-09-01
2. Differentiating roles of the reference alternative;Games and Economic Behavior;2024-07
3. Correlated choice;Theoretical Economics;2024