an economic theory of self control the concept of self control is incorporated in a theory of individual intertemporal choice by modeling the individual as an organization the individual at a point in time is assumed to be both a farsighted planner and a myopic doer the resulting conflict is seen to be fundamentally similar to the agency conflict between the owners and managers of a firm both individuals and firms use the same techniques to mitigate the problems which the conflicts create this paper stresses the implications of this agency model and discusses as applications the effect of pensions on saving saving and the timing of income flows and individual discount rates

policy uncertainty and household savings using german microdata and a quasi natural experiment we provide evidence on how households respond to an increase in uncertainty we find that household saving increases significantly following the increase in political uncertainty observed in the run up to the 1998 german general election we also find evidence of a labor supply response by workers who can use the margin offered by part time employment our results are suggestive of the economic effects of wars of attrition when political disagreement leads to delays in adopting a reform or the possibility that earlier reforms may be revoked the increased uncertainty could slow the economy

a review essay about foundations of neuroeconomic analysis by paul glimcher neuroeconomics aims to discover mechanisms of economic decision and express them mathematically to predict observed choice while the contents of neuroeconomic models and evidence are obviously different than in traditional economics some of the goals are identical to explain and predict choice the effects of comparative statics and perhaps make interesting new welfare judgments that are defensible to this end paul glimcher s important book carefully describes how economics psychological and neural levels of explanation can be linked a structure which has been successful in visual neuroscience as glimcher shows the neural evidence is quite strong for a process of learning valuations through prediction error and a simple model of neural valuation and comparison that corresponds to random utility though subject to normalization which produces menu effects there is also rapidly growing evidence for more complicated constructs in behavioral economics including prospect theory s account of risky choice hyperbolic time discounting level k models of games and social preferences corresponding to internal reward based on what happens to other agents

cognitive constraints on valuing annuities this paper documents consumers difficulty valuing life annuities using a purpose built experiment in the american life panel we show that the prices at which people are willing to buy annuities are substantially below the prices at which they are willing to sell them we also find that buy values are negatively correlated with sell values and that the sell buy valuation spread is negatively correlated with cognition this spread is larger for those with less education weaker numerical abilities and lower levels of financial literacy our evidence contributes to the emerging literature on heterogeneity in financial decision making abilities particularly regarding retirement payouts jel d14 d91 g11 h55

survival ambiguity and welfare abstract nearly all life cycle models adopt yaari s 1965 assumption that individuals know the survival probabilities that they face given that an individual s exact survival probabilities are likely unknown we explore the implications of relaxing this assumption if there is no annuity market then the welfare cost of survival ambiguity is large and regressive ambiguity neutral individuals would pay as much as 1 of total lifetime consumption for immediate resolution of ambiguity and the bottom income quintile is 4 times worse off than the top quintile alternatively with the availability of competitive annuity contracts survival ambiguity is welfare improving because it allows competitive insurance companies to pool risk across survival types even though social security and annuities share some properties social security does not help to hedge survival ambiguity

behavioral impediments to valuing annuities complexity and choice bracketing this paper examines two behavioral factors that diminish people s ability to value a lifetime income stream or annuity drawing on a randomized experiment with about 4 000 adults in a u s national

insider trading legislation and corporate governance this paper analyzes the impact of insider trading legislation on corporate governance in a context where large dominant shareholders can monitor underperforming companies managers have an incentive to give early warnings about adverse developments to dominant shareholders this information is effectively a bribe to induce dominant shareholders to sell their stock and refrain from intervention if insider trading is unregulated dominant shareholders collude with management at the expense of small shareholders the optimal regime forces the company to disclose all material information to the market private contracting between companies and shareholders leads to optimal insider trading regulation only if initial shareholders can enter a binding commitment otherwise large shareholders and managers recontract at the expense of small share holders enforcement also matters european union legislation requires inside information to be precise such a narrow definition creates a grey zone where information is private but cannot be classified as inside information as a result the effectiveness of corporate governance and firm value are reduced regulation in the us that treats shareholders with a stake exceeding 10 as insiders is potentially harmful

retrospectives edgeworth s hedonimeter and the quest to measure utility in this article i discuss some earlier debates about the foundations of utility and its measurement focusing on the contributions of francis y edgeworth 1845 1926 a famous british economist who was a leader in the development of a more mathematically structured economics in the late 1800s and irving fisher 1867 1947 one of the first quantitative u s economists best known today for his work on the quantity theory and interest rate theory edgeworth argued that utility was directly measurable and that new developments in physio psychology would make it possible to develop a hedonimeter that would allow economists to develop a firm physiological underpinning of utility fisher while agreeing with edgeworth that it was important to have a workable measure of utility disagreed with edgeworth about the possibility of doing so with a hedonimeter and hence of having any physiological underpinnings of utility he argued that instead of searching for physiological underpinnings of utility economists should instead rely upon backward induction from observed behavior to measured utility neither of these views about the possibility of utility measurement carried through and attempts to measure utility were abandoned in the 1930s when utility measurement and happiness considerations were determined to be outside the purview of economics both edgeworth and fisher knew that their approaches to utility measurement opened up a pandora s box of problems they opened that box nonetheless because they felt that theoretical economics had to be relevant to policy and to be relevant it had to face the problems

addiction and cue triggered decision processes we propose a model of addiction based on three premises 1 use among addicts is frequently a mistake 2 experience sensitizes an individual to environmental cues that trigger mistaken usage 3 addicts understand and manage their susceptibilities we argue that these premises find support in evidence from psychology neuroscience and clinical practice the model is tractable and generates a plausible mapping between behavior and the characteristics of the user substance and environment it accounts for a number of important patterns associated with addiction gives rise to a clear welfare standard and has novel implications for policy

a theory of rational addiction we develop a theory of rational addiction in which rationality means a consistent plan to maximize utility over time strong addiction to a good requires a big effect of past consumption of the good on current consumption such powerful complementarities cause some steady states to be unstable they are an important part of our analysis because even small deviations from the consumption at an unstable steady state can lead to large cumulative rises over time in addictive consumption or to rapid falls in consumption to abstention our theory also implies that cold turkey is used to end strong addictions that addicts often go on binges that addicts respond more to permanent than to temporary changes in prices of addictive goods and that anxiety and tensions can precipitate an addiction

plea bargaining and prosecutorial discretion a model of plea bargaining with asymmetric information is presented the prosecutor s private information consists of the strength of the case while the defendant s private information consists of h is guilt or innocence in equilibrium a fraction of cases are dismis sed because they are too likely to involve an innocent defendant in the remaining cases the prosecutor s offer of a sentence in exchange for a plea of guilty reveals the strength of the case it is shown t hat unlimited prosecutorial discretion may be socially disadvantageou s since it carries with it the requirement of sequential rationality copyright 1988 by american economic association

adding asymmetrically dominated alternatives violations of regularity and the similarity hypothesis an asymmetrically dominated alternative is dominated by one item in the set but not by another adding such an alternative to a choice set can increase the probability of choosing the item that dominates it this result points to the inadequacy of many current choice models and suggests product line strategies that might not otherwise be intuitively plausible

a dual self model of impulse control we propose that a simple dual self model gives a unified explanation for several empirical regularities including the apparent time inconsistency that has motivated models of quasi hyperbolic discounting and rabin s paradox of risk aversion in the large and small the model also implies that self control costs imply excess delay as in the o donoghue and rabin models of quasi hyperbolic utility and it explains experimental evidence that increased cognitive load makes temptations harder to resist the base version of our model is consistent with the gul pesendorfer axioms but we argue that these axioms must be relaxed to account for the effect of cognitive load

the welfare cost of perceived policy uncertainty evidence from social security policy uncertainty reduces individual welfare when individuals have limited opportunities to mitigate or insure against the resulting consumption fluctuations we field an original survey to measure the degree of perceived policy uncertainty in social security benefits and to estimate the impact of this uncertainty on individual welfare our central estimates show that on average individuals are willing to forgo 6 percent of the benefits they are supposed to get under current law to remove the policy uncertainty associated with their future social security benefits this translates to a risk premium from policy uncertainty equal to 10 percent of expected benefits

how basic are behavioral biases evidence from capuchin monkey trading behavior behavioral economics has demonstrated systematic decision making biases in both lab and field data do these biases extend across contexts cultures or even species we investigate this question by introducing fiat currency and trade to a colony of capuchin monkeys and recovering their preferences over a range of goods and gambles we show that capuchins react rationally to both price and wealth shocks but display several hallmark biases when faced with gambles including reference dependence and loss aversion given our capuchins inexperience with money and trade these results suggest that loss aversion extends beyond humans and may be innate rather than learned

why higher punishment may reduce deterrence abstract assuming that the willingness to find a potentially innocent defendant guilty is decreasing in punishments we derive two results deterrence is decreasing when punishments are too high and deterrence maximizing punishments tend to increase in the quality of legal systems

avoidance screening and optimum enforcement a standard assumption in the economic literature on crime and punishment is that fines are costless transfers given this assumption several economists have argued that it is optimal to set the fine for engaging in a proscribed activity as high as possible the argument is a simple one raising the probability of a fine is costly since it requires devoting more resources to monitoring and apprehending individuals in contrast raising the magnitude of a fine is costless therefore the least costly way to achieve a given expected fine is to set the fine as high as possible presumably equal to the offender s wealth and adjust its probability so that the desired expected fine is obtained

a cue theory of consumption psychological experiments demonstrate that repeated pairings of a cue and a consumption good eventually create cue based complementarities the presence of the cue raises the marginal utility derived from consumption in this paper such dynamic preferences are embedded in a rational choice model behavior that arises from this model is characterized by endogenous cue sensitivities costly cue management commitment and cue based spikes in impatience the model is used to understand addictive habit forming behaviors and marketing the model explains why preferences change rapidly from moment to moment why temptations should sometimes be avoided and how firms package and position goods

reasonable doubt and the optimal magnitude of fines should the penalty fit the crime models of the enforcement compliance relationship have assumed that both the probability and magnitude of fines are independent choice variables of policy makers these models indicate that it may be optimal to monitor with lowfrequency but to inflict uniformly maximal penalties for all infractions detected this article shows that if the judicial system is built on the reasonable doubt test then the penalty and the probability of conviction are not independent in particular as the penalty increases the probability of conviction falls as a result uniformly maximal penalties may actually encourage crime rather than deter it this article shows that optimal fines should rise with the severity of the infraction that is the penalty should fit the crime models of the enforcement compliance relationship generally treat both the probability and magnitude of fines as independent choice variables of the government this approach has led becker 1968 and others to conclude that it is optimal to set uniformly maximal penalties for all crimes and to set the probability of conviction at the minimum level necessary to enforce compliance with the law while this normative prescription is natural and intuitive there still remains a larger positive question of why in most nations of the world penalties are not uniformly high but rather rise with the severity of the crime one possible resolution of the positive and normative questions may lie in the fact that penalties and probabilities of conviction are not generally independent convictions are typically determined by judges or jurors who are instructed to convict only if the evidence convinces them beyond a reasonable doubt that the accused is guilty psychologists however have found that a juror s willingness to convict may be influenced by more than just the evidence jurors are very sensitive to the potential penalties that defendants may pay

testing for regret and disappointment in choice under uncertainty much of the experimental evidence concerning violations of von neumann morgenstern expected utility theory has been collected fr om experiments designed with conventional theory in mind and does not provide direct tests of alternative models such as regret theory and disappointment theory this paper reports and discusses recent evidence produced by an exp erimentspe cifically designed to test for the impacts of regret and disappointment and to indicate their relative importance copyright 1987 by royal economic society

starting point bias in dichotomous choice valuation with follow up questioning abstract follow up questions are frequently used to improve the efficiency of dichotomous choice contingent valuation questionnaires however a number of authors e g 12 16 have noted a significant difference between the wtp distributions implied by initial and follow up question responses this paper investigates starting point bias as one explanation for the phenomenon we develop a model of starting point bias in the context of dichotomous choice questioning with follow up using a monte carlo simulation to illustrate the potential bias imparted to wtp estimates an application is provided based on data from a cv study in northcentral iowa

welfare and generational equity in sustainable unfunded pension systems abstract using stochastic simulations we analyze how public pension structures spread the risks arising from demographic and economic shocks across generations we consider several actual and hypothetical sustainable paygo pension structures including 1 versions of the us social security system with annual adjustments of taxes or benefits to maintain fiscal balance 2 sweden s notional defined contribution system and several variants developed to improve fiscal stability and 3 the german system which also includes annual adjustments to maintain fiscal balance for each system we present descriptive measures of uncertainty in representative outcomes for a typical generation and across generations we then estimate expected utility for generations based on simplifying assumptions and incorporate these expected utility calculations in an overall social welfare measure using a horizontal equity index we also compare the different systems performance in terms of how neighboring generations are treated while the actual swedish system smoothes stochastic fluctuations more than any other and produces the highest degree of horizontal equity it does so by accumulating a buffer stock of assets that alleviates the need for frequent adjustments in terms of social welfare this accumulation of assets leads to a lower average rate of return that more than offsets the benefits of risk reduction leaving systems with more frequent adjustments that spread risks broadly among generations as those most preferred

context dependent preferences the standard theory of choice based on value maximization associates with each option a real value such that given an offered set the decision maker chooses the option with the highest value despite its simplicity and intuitive appeal there is a growing body of data that is inconsistent with this theory in particular the relative attractiveness of x compared to y often depends on the presence or absence of a third option z and the market share of an option can actually be increased by enlarging the offered set we review recent empirical findings that are inconsistent with value maximization and present a context dependent model that expresses the value of each option as an additive combination of two components a contingent weighting process that captures the effect of the background context and a binary comparison process that describes the effect of the local context the model accounts for observed violations of the standard theory and provides a framework for analyzing context dependent p

foundations of portfolio theory prize lecture to the memory of alfred nobel december 7 1990 this abstract was borrowed from another version of this item

estimating the economic model of crime employment versus punishment effects ann dryden witte 1980 has recently argued in this journal that new support is found for the deterrent hypothesis or the economic model of crime when individual data are employed to estimate the determinants of rearrest rates witte estimates a conventional economic model of crime using a rich and carefully constructed microdata set of released prisoners in north carolina her principal findings are that 1 increases in the certainty and severity of punishment tend to reduce participation in crime measured by number of arrests or convictions per month free and 2 higher legal wages have an extremely weak deterrent effect on crime in this comment i describe two separate data sets within which i find just the opposite results using a sample of offenders released from federal prisons in 1972 i find that increases in the severity of punishment are weakly related to participation in crime while increases in the certainty of punishment are positively related to participation in crime in addition using a sample of male repeat property offenders released from maryland prisons i find that higher wages have a strong and consistent deterrent effect on crime the conclusion is reached at least from these data sets that improving legitimate employment opportunities may be as effective if not more effective in reducing crime as is an increase in punishment

exposing false advertising countries rely on different public and private agents to enforce consumer protection and fair competition regulations to analyze the repercussions of different regimes on social welfare we consider the possibility of false advertising by a firm in an environment with duopolistic competition and with consumers who can be rational or naive regarding the trustworthiness of advertising claims we compare the incentives for and outcomes of false advertisement verification and injunction requests made by one of three parties a government agency with a broad focus maximizing ex post total welfare and two narrowly focused parties the first a public or private party focused on consumer welfare net of its own enforcement costs and the second a competitor interested exclusively in its own profits considering ex ante welfare we find that having a narrowly focused party as the plaintiff can be optimal due to government agency commitment problems the optimal regime depends on both the share of the population s naive consumers and the level of enforcement costs resume denonciation de la publicite mensongere pour veiller a l application des reglementations en matieres de protection des consommateurs et de concurrence loyale les etats s appuient sur differents regimes de controle representes par des agents publics et prives afin d analyser les repercussions de ces differents regimes sur le bien etre nous evaluons la possibilite qu une entreprise puisse diffuser de la publicite mensongere dans un environnement concurrentiel duopolistique avec des consommateurs potentiellement rationnels ou naifs relativement a la veracite des allegations publicitaires nous comparons les mesures incitatives pour controler la publicite mensongere et leurs resultats ainsi que les mises en demeure initiees par l une de ces trois parties une agence gouvernementale a visee large aux fins de maximisation totale du bien etre ex post et deux autres parties a visee plus ciblee l une publique ou privee tournee vers le bien etre des consommateurs deduction faite de ses propres co ts de mise en uvre et l autre representee par un concurrent s interessant exclusivement a ses propres profits en tenant compte du bien etre ex ante et en raison des problemes d engagement des agences gouvernementales nous constatons qu une procedure peut s averer optimale des lors que le demandeur represente une partie a visee plus ciblee le regime optimal depend a la fois de la proportion de consommateurs naifs et du niveau des couts de mise en uvre

psychological expected utility theory and anticipatory feelings we extend expected utility theory to situations in which agents experience feelings of anticipation prior to the resolution of uncertainty we show how these anticipatory feelings may result in time inconsistency we provide an example from portfolio theory to illustrate the potential impact of anticipation on asset prices

criminal deterrence in the reduced form a new perspective on ehrlich s seminal study i introduction perhaps the best known and most influential econometric analysis of the deterrent effect of criminal penalties is isaac ehrlich s 1973 participation in illegitimate activities a theoretical and empirical analysis he reported large and significant marginal deterrent effects of penalties for a wide range of crimes ehrlich s work was heavily criticized on methodological grounds and many subsequent studies have contradicted his results while still others have not 1 nonetheless ehrlich s work remains an important hallmark in the study of criminal deterrence this note is motivated by recent research that indicates that penalties may have indirect consequences that could reduce their deterrent effect higher penalties could for instance encourage a criminal to spend more effort avoiding detection and prosecution malik 1990 and snyder 1990 for instance as lott 1987 1992 shows higher penalties may increase the amount of money criminals spend on legal defense 2 this means that higher penalties could reduce the probability of apprehension and conviction in addition a feature of the legal system may generate another way for higher penalties to reduce the probability of punishment this feature is that judges and juries must apply the reasonable doubt test to their decision to convict a defendant assume that jurors establish the level of doubt which is reasonable by finding the threshold that will minimize expected social losses if juries like criminals have a forecast of likely penalties then as the expected penalty rises the cost of an incorrect conviction also rises this means the juror s threshold level of reasonable doubt will rise as well the effect is to reduce the probability that a given defendant will be convicted andreoni 1991 if either the avoidance or the reasonable doubt effect is significant then this will mitigate the direct deterrent effect of penalties on crime rates reexamining ehrlich s work we see that his prime objective was to identify a single equation in a three equation simultaneous equations system that being the equation predicting crime rates he found significant negative coefficients on penalties which he took as evidence for his theoretical model of criminal behavior in which criminals could be deterred by higher penalties if more recent theories are correct in claiming that higher penalties may also decrease the chance of conviction then ehrlich s estimation of the single equation will not tell a complete story in particular we must estimate a reduced form model which will capture both the direct and indirect effects of penalties on crime rates this paper will address these questions using ehrlich s original data replicating ehrlich s regressions we find strong direct deterrent effects of penalties however we also find that increased penalties have a significant negative affect on the probability of conviction as predicted by the theoretical studies we combine these effects by examining the reduced form equations for both crime rates and probabilities of conviction we find that the total effect of penalties on crime rates is approximately zero for all twelve crime categories considered but that the effects of penalties on probabilities of conviction remain negative and significant in the reduced form equations this note allows for two general conclusions first we provide some evidence for theoretical models that predict that penalties may reduce the probability that criminals will be convicted second and more importantly despite one s views on the many widely discussed methodological issues surrounding ehrlich s seminal work when generalized to account for possibilities that higher penalties may reduce the probability of conviction his data generate much different policy implications than those widely adopted at the time of his paper s publication ii specification this section discusses the specification of the structural equations for ehrlich s original study

contextual inference in markets on the informational content of product lines context can influence decisions this malleability of choice is usually invoked as evidence that people do not maximize stable preference orderings in a market equilibrium however context conveys payoff relevant information to consumers consequently these consumers rationally violate naive formulations of standard choice theoretic principles i identify informational asymmetries under which apparently anomalous behaviors namely the compromise effect and choice overload arise as market equilibria firms respond to consumers contextual inference in case of the compromise effect a firm may introduce premium loss leaders expensive goods of overly high quality that increase the demand for other goods

optimal pollution standards and non compliance in a dynamic framework in this paper we present a stackelberg differential game to study the dynamic interaction between a polluting firm and a regulator who sets pollution limits overtime at each time the firm settles emissions taking into account the fine for non compliance with the pollution limit and balances current costs of investments in a capital stock which allows for future emission reductions we derive two main results first we show that the optimal pollution limit decreases as the capital stock increases while both emissions and the level of non compliance decrease second we find that offering fine discounts in exchange for firm s capital investment is socially desirable we numerically obtain the optimal value of such discount which crucially depends on the severity of the fine in the limiting scenario with a very large severity of the fine the optimal discount implies that no penalties are levied since the firm shows adequate adaptation progress through capital investment

anticipation and the valuation of delayed consumption this paper presents a model of intertemporal choice that incorporates savoring and dread i e utility from anticipat ion of delayed consumption the model explains why an individual with positive time preference may delay desirable outcomes or get unpleas ant outcomes over with quickly contrary to the prediction of convent ional formulations of intertemporal choice implications of savoring and dread for savings behavior empirical estimation of discount rate s and public policy efforts to combat myopic behavior are explored the model provides an explanation for common violations of the indepe ndence axiom as applied to intertemporal choice copyright 1987 by royal economic society

measuring beliefs and rewards a neuroeconomic approach the neurotransmitter dopamine is central to the emerging discipline of neuroeconomics it is hypothesized to encode the difference between expected and realized rewards and thereby to mediate belief formation and choice we develop the first formal test of this theory of dopaminergic function based on a recent axiomatization by caplin and dean 2008a these tests are satisfied by neural activity in the nucleus accumbens an area rich in dopamine receptors we find evidence for separate positive and negative reward prediction error signals suggesting that behavioral asymmetries in response to losses and gains may parallel asymmetries in nucleus accumbens activity

making the crime fit the penalty the role of prosecutorial discretion under mandatory minimum sentencing abstract this paper empirically documents one way in which prosecutorial discretion may be used to dampen the effects of mandatory minimum sentencing laws specifically prosecutors can use their discretion over prosecution charges to circumvent a mandatory minimum sentencing law for some defendants by prosecuting defendants who were initially arrested for the crime targeted by the sentencing law for lesser crimes not covered by the law i document the use of such discretion with respect to several state three strikes type repeat offender laws imposed throughout the 1990s and i find that prosecutors become significantly more likely to lower a defendant s prosecution charge to a misdemeanor when conviction for the initial felony arrest charge would lead to sentencing under a three strikes law moreover accounting for such behavior is important as i show that failure to do so can lead to overstating the effects of these laws on average sentencing by almost 30 percent

should the wealthy be able to buy justice this paper shows that allowing wealthy individuals to influence the outcome of their trials through the purchase of legal services can be consistent with the optimal penalty literature using this analysis the author reviews some of the advantages and disadvantages of varying the length of jail terms versus varying the probability of conviction finally implications for the bail prosecutorial and plea bargaining systems are examined copyright 1987 by university of chicago press

a general equilibrium model of crime commission and prevention abstract the model developed in this paper features a general equilibrium specification of the relationships among criminals victims of crime and a law enforcement agency these relationships are employed to endogenously derive an explicit intuitively appealing technology of crime commission and prevention the solution to the present model is therefore obtained with a set of more elementary assumptions than the previous literature where arbitrary curvature assumptions are invoked

do we punish high income criminals too heavily many critics believe that since high income criminals can afford to purchase better legal services they are less severely punished than poor criminals who commit equivalent crimes others are concerned that the penalties imposed on criminals are too small this paper shows that ignoring the effect conviction has on later earnings dramatically underestimates the total monetary penalty paid by those convicted and that the penalty structure is extremely progressive where evidence on the probability of conviction is available it shows that the highest income criminals face the highest expected penalties

utilitarianism and horizontal equity the case for random taxation this paper establishes that far from being able to derive the principle of horizontal equity from utilitarianism the principle is actually in consistent with utilitarianism in a variety of circumstances we derive conditions under which a it is optimal to impose random tax schedules ex post randomization and b it is optimal to randomize the tax schedules imposed on a set of otherwise identical individuals ex ante randomization the implications for optimal tax theory are discussed more generally it is shown that there are a number of potentially important economic situations with which the principle of horizontal equity may be inconsistent not only with utilitarianism but even with pareto optimality this abstract was borrowed from another version of this item

search and satisficing many everyday decisions are made without full examination of all available options and as a result the best available option may be missed we develop a search theoretic choice experiment to study the impact of incomplete consideration on the quality of choices we find that many decisions can be understood using the satisficing model of herbert simon 1955 most subjects search sequentially stopping when a satisficing level of reservation utility is realized we find that reservation utilities and search order respond systematically to changes in the decision making environment jel d03 d12 d83