ACanonicalModelofChoice.PDFVIP

The Review of Economic Studies Advance Access published November 7, 2013 Review of Economic Studies (2013) 0, 1–33 doi:10.1093/restud/rdt037 ? The Author 2013. Published by Oxford University Press on behalf of The Review of Economic Studies Limited. A Canonical Model of Choice with Initial Endowments YUSUFCAN MASATLIOGLU University of Michigan Downloaded from and EFE A. OK New York University / First version received May 2009; ?nal version accepted June 2013 (Eds.) We use the revealed preference method to derive a model of individual decision making when the endowment of an agent provides a reference point that may in?uence her choices. This model generalizes the classical rational choice model, which views choice as a consequence of “utility maximization”. Instead, our model sees choice as arising from “psychologically constrained utility maximization”, where the constraints are induced by one’s initial endowment. In particular, this model produces status quo bias as a natural consequence (but not necessarily the endowment effect). A range of economic applications identify the predictive and exp