Social decision theory: choosing within and between groups

We study the behavioral foundation of interdependent preferences, where the outcomes of others affect the welfare of the decision maker. These preferences are taken as given, not derived from more primitive ones. Our aim is to establish an axiomatic foundation providing the link between observations of choices and a functional representation which is convenient, free of inconsistencies and can provide basis for measurement. The dependence among preferences may take place in two conceptually different ways, expressing two different views of the nature of interdependent preferences. The first is Festinger's view that the evaluation of peers' outcomes is useful to improve individual choices by learning from the comparison. The second is Veblen's view that interdependent preferences keep track of social status derived from a social value attributed to the goods one consumes. Corresponding to these two different views, we have two different formulations. In the first the decision maker values his outcomes and those of others on the basis of his own utility. In the second, he ranks outcomes according to a social value function. We give different axiomatic foundations to these two different, but complementary, views of the nature of the interdependence. On the basis of this axiomatic foundation we build a behavioral theory of comparative statics within subjects and across subjects. We characterize preferences according to the relative importance assigned to gains and losses in social domain, that is, pride and envy. This parallels the standard analysis of private gains and losses (as well as that of regret and relief ). We give an axiomatic foundation of inter personal comparison of preferences, ordering individuals according to their sensitivity to social ranking. These characterizations provide the behavioral foundation for applied analysis of market and game equilibria with interdependent preferences.