Interdependent Preferences and Segregating Equilibria Articles uri icon

publication date

  • March 2008

start page

  • 99

end page

  • 113

issue

  • 1

volume

  • 139

International Standard Serial Number (ISSN)

  • 0022-0531

Electronic International Standard Serial Number (EISSN)

  • 1095-7235

abstract

  • This paper shows that models where preferences of individuals depend not only on their allocations, but also on the well being of other persons, can produce both large and testable effects. We study the allocation of workers with heterogeneous productivities to firms. We show that even small deviations from purely "selfish" preferences leads to widespread workplace skill segregation. That is, workers of different abilities tend to work in different firms, as long as they care somewhat more about the utilities of workers who are "close". This result holds for a broad class and distribution of social preferences.