A Theory of General Equilibrium with Reference-Dependent Preferences

A theory is proposed in which preferences are conditional on reference points. Preferences conditional on any given reference point satisfy the usual assumptions of cunsumer theory. Apart from a continuity condition, the only additional restriction is to rule out cycles of pairwise choice. The theory is consistent with observations of endowments effects. Under certain assumptions, an exchange economy with reference-dependent preferences will converge to an equilibrium which is Pareto-optimal in an appropriately defined sense.