Three essays on interdependent preferences

The three essays in this dissertation examine individual concerns for relative position. The first essay explores the possibility that individuals are born without intrinsic preferences over observable goods; instead, their preferences are entirely socially determined. The main finding is that there is a one-to-one mapping between neoclassical preferences and socially based preferences. When individual preferences are socially formed, a purely redistributive taxation policy is welfare-neutral. Since agents' preferences are interdependent, their choices are made in a strategic setting. In the non-trivial case of two positional goods, the equilibrium choices depend on the social comparability of the goods. The second essay extends the model of the first chapter to the situations in which agents compare themselves to others “locally”, i.e. when their exogenously given comparison group is localized around their present wealth. The results indicate that socially formed preferences may result in attitudes toward risk that are consistent with prospect theory. The last essay considers the consumer's choice between an observable and an unobservable consumption good. Since observable consumption results in relative comparisons, the consumer's choice is made in a strategic setting. An equilibrium of the game exists for some specification of preferences. The advantage of this approach is that it allows for an analysis of equilibrium choices as a function of income distributions, as well as effects of exogenous changes in income distribution on the consumption and expenditure. The results are potentially important for income redistribution and consumption tax policy.