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We propose a theory of status quo-dependent choice which we first axiomatically characterize and then apply to game theoretic settings. Moving away from a status quo leads the agent to incur a switching cost that can vary depending upon which alternative the agent switches to and from. In a choice problem with a status quo, the agent chooses the available alternative whose utility net of the switching cost is the highest. Our theory not only generates the status quo bias phenomenon but also allows for the status quo to yield a graded reference effect. In our application, we extend the notion of Nash Equilibrium and among various other results, we find (i) cooperation in the Prisoners' Dilemma game may be a Nash Equilibrium and (ii) the extended Nash Equilibrium of a game coincides with the Nash Equilibrium of nearby games.
