Law and Preferences

Legal rules do more than provide incentives, they change people.When preferences and norms are endogenously determined via aprocess of imitation and learning, legal rules, by affectingthe market outcome, may affect the dynamics of preference formation.Analyzing the effect of different legal rules should thereforego beyond the analysis of the incentives they provide. It shouldalso include an analysis of their effect on the distributionof preferences and norms of behavior. We illustrate this claimby considering a simple market game in which individuals mayhave preferences that include fairness concerns. We show thatdifferent legal rules change not only the pattern of trade ina market game, but also individuals' fairness concerns. Thatis, different rules may eventually make individuals care more(or less) about a fair outcome. Specifically, our model suggeststhat enhanced remedies for breach of contract may reduce equilibriumpreferences for fairness.