Abstract
We combine empathetic and reference-dependent preferences to a more comprehensive model of decision-making. Empathy can refer to other people's basic needs (exogenous reference points) as well as others' ambitions in the form of social comparisons. Empathy with others' ambitions results in inequality aversion (Fehr and Schmidt, 1999, Quarterly Journal of Economics, Vol. 114, pp. 817-868). Here our model also implies that the Fehr-Schmidt parameters are positively correlated. In addition our model accommodates social value orientations, showing that a competitive orientation implies sensitivity to own ambitions. For linear public goods games, we furthermore provide an explanation for hump-shaped preferences which assumes sensitivity to others' needs.
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