Exogenous Endowment-Endogenous Reference Point∗

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We develop a model in the presence of categories that creates a link between the agent's exogenous endowment and an endogenous reference point. The reference point is the best feasible alternative in the endowment's category. This reference generates a constraint set from which the final choice is made according to utility maximisation. The model predicts category bias, which generalises the status quo bias by attracting the agent to her endowment's category but not necessarily to the endowment itself. We show that it accommodates recent experimental findings regarding the presence and absence of status quo bias in the realm of uncertainty. In a stylised financial setup, we show that it may lead to a risk premium even with risk-neutral agents.

Original languageEnglish
Pages (from-to)160-182
Number of pages23
JournalEconomic Journal
Issue number625
StatePublished - 1 Jan 2020

Bibliographical note

Publisher Copyright:
© 2019 Royal Economic Society. Published by Oxford University Press.

ASJC Scopus subject areas

  • Economics and Econometrics


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