Individuals prefer to interact with others whose preferences are consistent with their objectives.
One cares about the preferences of those with whom one interacts in part because these preferences affect not only the degree to which objectives conflict, but also the effectiveness of the incentives that one may deploy to induce others to act in ways advantageous to oneself. The reason is that where contracts are incomplete, as is often the case, preferences of the parties to an exchange affect the level and distribution of gains from trade. The study of human capital provides an illustration. Many have interpreted the substantial economic returns to schooling as a return to the skills produced by schooling. We argue that schooling raises wages in addition by improving employees' responsiveness to incentives.