A Reformulation of Normative Economics for Models with Endogenous Preferences
This paper proposes a framework to balance considerations of welfarism and virtue ethics in the normative analysis of economic models with endogenous preferences. We introduce the moral evaluation function (MEF), which ranks alternatives based purely on virtue ethics, and define the social objective function (SOF), which combines the Social Welfare Function (SWF) and the MEF. In a model of intergenerational altruism with endogenous time preference, using numerical simulations we show that maximizing the SWF may not yield a socially desirable state if the society values virtue. This problem can be resolved by using the SOF to evaluate alternative social states.
Many theoretical and empirical studies have emphasized and identified various channels through which preferences might be endogenously determined in the economy. In the models studied in the literature of intergenerational cultural preference transmission and formation (see Bisin and Verdier (2011)for a survey), children’s preferences are affected by parents’ decisions. Habit formation models have been used in macroeconomics (see, e.g., Lawrence, Eichenbaum and Evans (2005)), and finance (see, e.g., Constantinides (1990)). Addiction models have been used in microeconomis (e.g., Becker and Murphy (1988)). In the literature of behavioral economics, reference points are often endogenously determined (see, e.g., K˝oszegi and Rabin (2006)).