Three essays on behavioral economics

This dissertation investigates two topics on behavioral economics: reference-dependent preferences and social utility. Chapter 1 and 2 provide field evidence from labor market and financial market to support reference-dependent model that treats expectations as reference points. Chapter 3 explores the implications of social distance on the endogenous emergence of personal relationships and impersonal market exchange.;Chapter 1: A model of cabdrivers' labor supply is proposed, building on Farber's (2005, 2008) empirical analyses and Koszegi and Rabin's (2006; henceforth "KR") theory of reference-dependent preferences. Following KR, the proposed model has targets for hours as well as income, determined by proxied rational expectations. The model, estimated with Farber's data, reconciles his finding that stopping probabilities are significantly related to hours but not income with Colin Camerer et al.'s (1997) negative "wage" elasticity of hours; and avoids Farber's criticism that estimates of drivers' income targets are too unstable to yield a useful model of labor supply.;Chapter 2: An investor' aversion to losses relative to a reference point in the stock market predicts a V-shaped relationship between the optimal position in a stock and current gains from that stock. Estimates from Odean's (1999) individual trading records show that (i) the predicted V-shape relationship exists for a large majority of investors, and (ii) expectations are the most likely determinant of investors' reference points. The V-shaped relationship and the implication of the initial purchase decision that expectations are mostly positive yield a simple explanation of the disposition effect.;Chapter 3: Personal relationships and impersonal exchange have been previously modeled in ways that prevent them from coexisting in equilibrium as contract enforcement mechanisms. Empirical evidence nonetheless suggests that they sometimes coexist. This paper introduces social surplus into exchange payoff, which is determined by social distance and specific to personal relationships but not to impersonal exchange. This approach allows the two modes of exchange to coexist in equilibrium. The possibility of impersonal exchange improves welfare and equality among buyers in general. But there also exist cases where competition between the two forms of exchange makes welfare and equality deteriorate.