When it comes to institution construction, why does it matter if people are only self-interested or if they are more than self-interested? Distinguish between self-interested behaviors and social...

When it comes to institution construction, why does it matter if people are only self-interested or if they are more than self-interested? Distinguish between self-interested behaviors and social preferences.

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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Traditionally, economics assumes that people act in self-interested ways.  That means that all that people consider when they are going to decide how to act is how their action will affect them.  They will choose the action that is best for them in a tangible way. 

However, there is also a subdiscipline of economics that is called behavioral economics.  This subdiscipline does not simply assume that people act out of self-interest.  Instead, behavioral economists try to study what things other than self-interest can motivate people.  One of the things that they study is social preferences.  Social preferences are factors other than self-interest that can motivate people to behave in certain ways.  For example, people can be motivated by fairness.  They might chose to pay a higher price for a meal at a restaurant if they believe that the restaurant pays its employees a living wage.  People who make this choice are acting in a way that is contrary to their tangible self-interest but is in line with their social preference for fairness.

This question of how people act is important when it comes to building institutions because it tells us what incentives we need to create.  If people only act out of self-interest, institutions can only be created if they work to further people’s self-interest.  If people act on social preferences, institutions can be built that appeal to those preferences.

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sandy790210 | eNotes Newbie

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When it comes to institution construction, why does it matter if people are only self-interested or if they are more than self-interested?Distinguish between self-interested behaviors and social preferences.

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