Finally, in the third part, we explore some potential economic consequences of endogenous
preferences. The impact of social institutions on preferences may contribute to the persistence of
group inequality. The impact of violent conflicts on preferences may contribute to the difficulty
of resolving the conflicts. Minimum wage laws may create entitlement effects. Changes in the
way of eliciting preferences (e.g., the use of default options) may affect the extent to which
individuals construct their preferences, in turn inducing swings in the choices they make. The
development of the welfare state may change the preferences parents instill in their children.
Most of the implications we discuss in this part have the status of untested hypotheses and so
provide a rich menu of opportunities for empirical research.
1. Economists’ Reluctance to Explain Behavioural Changes by Preference Changes
As discussed above, the standard approach in economics is to begin by characterizing
individuals’ preferences and the constraints that individuals face when making choices. Then
changes in behaviour are explained as responses of optimizing agents to changes in prices,
information, and technology that change the payoffs and the available set of actions. Preferences
are assumed to be exogenous and stable with regard to the changes in the constraints. There is no
doubt that this approach has been very useful, and in many applications the assumption that
preferences are - at least in the short run - unaffected by changes in constraints may be justified.
However, as we will argue later, the assumption that social institutions generally leave
preferences unaffected is implausible in view of the evidence that we discuss in Section 2. In
addition, this assumption may well prevent us from a deeper understanding of interesting and
important phenomena, as we discuss in Section 3.
The convention against invoking preference changes as an explanation for behavioural
changes has been very strong in economics. In some circles, invoking preference changes was
condemned as bad science: “... assumptions of unstable tastes have been a convenient crutch to
lean on when the analysis has bogged down. They give the appearance of considered judgment,
yet really have only been ad hoc arguments that disguise analytical failures” (Stigler and Becker,
1977, p. 89).
One reason for the opposition to invoking preference changes as explanatory factors is the
fear that such explanations introduce so many free variables that the researcher can explain