Moral Costs and Rational Choice: Theory and Experimental Evidence

Literature exploring other-regarding behavior reveals interesting phenomena, yet less attention has been given to implications for foundational assumptions within economics. Our study synthesizes the evidence, explaining why recent work challenges rational choice theory as well as its special case, convex preference theory. Guided by this understanding, we advance a theory of choice that exhibits monotonicity with respect to observable reference points. This modification of choice theory establishes consistency with otherwise-anomalous data. We explain how our theory organizes extant data and has applications to strategic games with contractions. We report an experiment designed to test central features of the new theory. JEL Classifications: C93, D03, D64