Social Decision Theory: Choosing within and between Groups

We introduce a theoretical framework in which to study interdependent preferences, where the outcome of others affects the preferences of the decision maker. The dependence may take place in two conceptually different ways, depending on how the decision maker evaluates what the others have. In the first he values his outcome and that of others on the basis of his own utility. In the second, he ranks outcomes according to a social value function. These two different views of the interdependence have separate axiomatic foundations. We then characterize preferences according to the relative importance assigned to social gains and losses, or in other words to pride and envy. Finally, we study a two period economy in which agents have our social preferences. We show how envy leads to conformism in consumption behavior and pride to diversity.