Introducing Virtue Ethics into Normative Economics for Models with Endogenous Preferences∗

An important role of normative economics is to provide an analytical framework to evaluate social states. Such an evaluation is based on value judgments derived from moral views of the members of the society. There exist three major approaches in normative ethics, which formalize many people’s moral views. These are consequentialism that focuses on consequences of actions such as utilitarianism; deontology that focuses on moral duties, and virtue ethics that focuses on the cultivation of virtues and the moral character of people. Among these, important aspects of consequentialism and deontology have been incorporated into social welfare functions. However, normative economics does not have a formal analytical framework for virtue ethics. The purpose of this paper is to develop such a framework for models with endogenous preferences. We apply this framework to a rational addiction model and an intergenerational altruism model. We find that introduction of virtue ethics can lead to very different policy recommendations than those based solely on social welfare functions. Importantly, in contrast to the commonly held view, we find that incorporating virtue ethics into normative economic analysis may not always lead to greater government interventions in the market. JEL: A13, D04, D63 ∗This paper was prepared in part while Ogaki was a visiting scholar at the Institute for Monetary and Economic Studies at the Bank of Japan. Earlier versions were circulated under the title “A Reformulation of Normative Economics for Models with Endogenous Preferences.” We would like to extend our special thanks to Noah Smith for introducing us to Pollak (1978) and to the concept of meta-preferences, as well as for many comments and discussions about many aspects of this paper, and to Toyotaka Sakai for his suggestions about the formulation of the social objective function. We would also like to thank Russell Cooper, Takanori Ida, Shinsuke Ikeda, Mamoru Kaneko, Fumio Ohtake, Jaeok Park, Julio Rotemberg, Makoto Saito, Tom Sargent and seminar and session participants at the Bank of Japan; Bar Ilan, James Madison, Keio, Kyoto, Pennsylvania State, Tel Aviv and Xiamen Universities; the City University of Hong Kong; the 2012 Association of Behavioral Economics and Finance Meeting, the 2013 Japanese Economic Association Meeting, the Canon Institute for Global Studies Conference on Macroeconomic Theory and Policy 2014, the 2014 Society for Advancement of Economic Theory Conference, and the 16th Marco Conference for comments. O’s research was partially supported by JHPS Kakenhi Grant Number 25285063. Bhatt’s research was partially funded by the JSPS Postdoctoral Fellowship for Foreign Researchers. Ogaki: Faculty of Economics, Keio University, 612 Mita-Kenkyu-shitsu 2-15-45 Mita Minato-ku, Tokyo 108-8345, Japan. E-mail: [email protected]., Phone: +81-3-5418-6403, Fax: +81-3-5418-6403