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Title: Other-Regarding Preferences in General Equilibrium

Author(s): Martin Dufwenberg, Paul Heidhues, Georg Kirchsteiger, Frank Riedel and Joel Sobel

Publication Date: May 2008

Keyword(s): markets, other-regarding preferences, self-interest and welfare

Programme Area(s): Industrial Organization

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.

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Bibliographic Reference

Dufwenberg, M, Heidhues, P, Kirchsteiger, G, Riedel, F and Sobel, J. 2008. 'Other-Regarding Preferences in General Equilibrium'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=6815