We use the revealed preference method to derive a model of individual decision making when one’s endowment provides a reference point that may influence her choices. This model generalizes the classical rational choice model. While the latter views choice as a consequence of “utility maximization,” the model proposed here views choice as arising from “mentally constrained utility maximization,”...

We study the Markov equilibria of a model of free riding in which n infinitely lived agents choose between private consumption and irreversible contributions to a durable public good. We show that the set of equilibrium steady states converges to a unique point as depreciation converges to zero. For any level of depreciation, moreover, the highest steady state converges to the efficient level a...

Deferred acceptance (DA), a widely implemented algorithm, is meant to improve allocations: under classical preferences, it induces preference-concordant rankings. However, recent evidence shows that—in both real, large-stakes applications and experiments—participants frequently play seemingly dominated, significantly costly strategies that avoid small chances of good outcomes. We show theoretic...

This paper presents the partial analytical solution to a model of periodic consumption that incorporates imperfect capital markets and uncertainty. Our model assumes that consumption decisions occur more frequently than income receipt. We show that the week specific consumption functions can be ordered. At low levels of wealth these functions exhibit a “ushaped” pattern between income receipts....

The paper introduces the concept of adjustment utility, that is, referencedependent utility from expectations. It offers an explanation for observed preferences that cannot be explained with existing models, and yields new predictions for individual decision making. The model gives a simple explanation for, e.g., why people are reluctant to change their plans even when these turn out to be unex...

The standard revealed preference argument relies on an implicit assumption that a decision maker considers all feasible alternatives. However, the marketing and psychology literatures provide well-established evidence that consumers do not consider all brands in a given market before making a purchase (Limited Attention). In this paper, we illustrate how one can deduce both the decision maker’s...

Considering markets with nonpivotal buyers, we analyze the anticompetitive effects of breakup fees used by an incumbent facing a more efficient entrant in the future. Buyers differ in their intrinsic switching costs. Breakup fees are profitably used to foreclose entry, regardless of the entrant’s efficiency advantage or level of switching costs. Banning breakup fees is beneficial to consumers. ...

In decision-making involving multiple criteria or attributes, the attributes are often divided into core and non-core attributes. A dominance principle is formulated in terms of core attributes, and this principle is applied whenever it is applicable. If, however, the dominance principle defined in terms of core attributes is not applicable, then non-core attributes are consulted in comparing o...

Yearly sales of “fair trade” products exceeds $2.3 billion worldwide. Consumers who are altruistic and rational will choose these product-donation bundles when the bundle is cheaper than its elements. Assume a supplier’s investment reduces retailers’ costs (or improves quality), but this investment is non-verifiable, hence sub-optimal even with infinitely-repeated interaction. A retailer paying...

Motivated by real life decision problems, we model a boundedly rational choice procedure, called choice by iterative elimination, where an alternative might not be compared by all available alternatives. Our decision maker continues her limited search until she finds an alternative which is optimal within its consideration set. We study properties of this procure and provide a full characteriza...