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Social Preferences and Competition


  • Paper prepared for the JMCB-SNB-UniBern conference “Dialogue between Micro- and Macroeconomics” at Gerzensee, Switzerland, October 23–24, 2009. I would like to thank Mark Blöchinger, Ernst Fehr, Georg Gebhardt, David Laibson, Monika Schnitzer and conference participants for helpful comments and suggestions. I am especially grateful to two anonymous referees and the editor, Masao Ogaki, whose detailed feedback greatly improved the paper. Financial support by the German Excellence Initiative and the Deutsche Forschungsgemeinschaft through SFB-TR 15 is gratefully acknowledged.


There is a general presumption that social preferences can be ignored if markets are competitive. Market experiments (Smith 1962) and recent theoretical results (Dufwenberg et al. Forthcoming) suggest that competition forces people to behave as if they were purely self-interested. We qualify this view. Social preferences tend to be irrelevant if two conditions are met: separability of preferences and completeness of contracts. These conditions are often plausible, but they fail to hold when uncertainty is important (financial markets) or when incomplete contracts are traded (labor markets). Social preferences can explain many of the anomalies frequently observed on these markets.