consumer protection and contingent charges contingent charges for financial services such as fees for unauthorized overdrafts are often controversial we study the economics of contingent charges in a stylized setting with naive and sophisticated consumers we contrast situations where the naive benefit from the presence of sophisticated consumers with situations where competition works to subsidize the sophisticated at the expense of the naive arguably unfairly the case for regulatory intervention in these situations depends in good part but not only on the weight placed on distributional concerns the economic and legal issues at stake are well illustrated by a case on bank charges recently decided by the u k supreme court jel d14 d18 g21 g28 l51

market frictions a unified model of search costs and switching costs it is well known that search costs and switching costs can create market power by constraining the ability of consumers to change suppliers while previous research has examined each cost in isolation this paper demonstrates the benefits of examining the two types of friction in unison the paper shows how subtle distinctions between the two costs can provide important differences in their effects upon consumer behaviour competition and welfare in addition the paper also illustrates a simple empirical methodology for estimating separate measures of both costs while demonstrating a potential bias that can arise if only one cost is considered

unshrouding evidence from bank overdrafts in turkey lower prices produce higher demand or do they a bank s direct marketing to holders of free checking accounts shows that a large discount on 60 apr overdrafts reduces overdraft usage especially when bundled with a discount on debit card or auto debit transactions in contrast messages mentioning overdraft availability without mentioning price increase usage neither change persists long after the messages stop these results do not square easily with classical models of consumer choice and firm competition instead they support behavioral models where consumers underestimate and are inattentive to overdraft costs and firms respond by shrouding overdraft prices in equilibrium this article is protected by copyright all rights reserved

substitution elasticities between ghg polluting and nonpolluting inputs in agricultural production a meta regression abstract this paper reports meta regressions of substitution elasticities between greenhouse gas ghg polluting and nonpolluting inputs in agricultural production which is the main feedstock source for biofuel in the u s we treat energy fertilizer and manure collectively as the polluting input and labor land and capital as nonpolluting inputs we estimate meta regressions for samples of morishima substitution elasticities for labor land and capital vs the polluting input much of the heterogeneity of morishima elasticities can be explained by type of primal or dual function functional form type and observational level of data input categories number of outputs type of output time period and country categories each estimated long run elasticity for the reference case which is most relevant for assessing ghg emissions through life cycle analysis is greater than 1 0 and significantly different from zero most predicted long run elasticities remain significantly different from zero at the data means these findings imply that life cycle analysis based on fixed proportion production functions could provide grossly inaccurate measures of ghg of biofuel

overconfident consumers in the marketplace when consumers sign contracts expectations about future usage of the product or service matter for instance the value provided by car insurance depends on how likely a consumer believes she is to file a claim the value provided by a gym membership depends on how often a consumer anticipates going to the gym and the value provided by a cellular phone contract depends on how many gigabytes of data a consumer anticipates using the standard modeling paradigm makes the expedient assumption that consumers have rational expectations imposing rational expectations drastically simplifies models and eliminates the need to directly measure beliefs as they coincide with the distribution of observed outcomes yet a large literature shows that consumer beliefs often deviate substantially from rational expectations in systematic ways this has important consequences for contract design firm profits consumer welfare and public policy the term overconfidence is used broadly in the psychology literature referring to both overoptimism and overprecision overoptimistic individuals overestimate their own abilities or prospects either in absolute terms or in comparison to others in contrast overprecise individuals place overly narrow confidence intervals around forecasts thereby underestimating uncertainty these biases can lead consumers to misforecast their future product usage or to overestimate their abilities to navigate contract terms in consequence consumer overconfidence causes consumers

consumer scores and price discrimination we study the implications of aggregating consumers purchase histories into scores that proxy for unobserved willingness to pay a long lived consumer interacts with a sequence of firms each firm relies on the consumer s current score a linear aggregate of noisy purchase signals to learn about her preferences and to set prices if the consumer is strategic she reduces her demand to manipulate her score which reduces the average equilibrium price firms in turn prefer scores that overweigh past signals relative to applying bayes rule with disaggregated data as this mitigates the ratchet effect and maximizes the firms ability to price discriminate consumers with high average willingness to pay benefit from data collection because the gains from low average prices dominate the losses from price discrimination finally hidden scores those only observed by the firms reduce demand sensitivity increase average prices and reduce consumer surplus sometimes below the naive consumer level

payment card rewards programs and consumer payment choice abstract by using a unique data set that contains detailed information about consumer payment choice and consumers attitudes toward each payment method we estimate the effects of payment card rewards on consumer choice of payment methods our approach allows us to control for consumer heterogeneity we find the effects of rewards to be statistically significant across five retail types our policy experiments suggest that for the sub population who hold both credit and debit cards removing rewards would increase their share of paper based payment methods i e cash and checks measured in terms of in store transactions by no more than 4 percentage points

selling to overconfident consumers consumers may overestimate the precision of their demand forecasts this overconfidence creates an incentive for both monopolists and competitive firms to offer tariffs with included quantities at zero marginal cost followed by steep marginal charges this matches observed cellphone service pricing plans in the us and elsewhere an alternative explanation with common priors can be ruled out in favor of overconfidence based on observed customer usage patterns for a major us cellular phone service provider the model can be reinterpreted to explain the use of flat rates and late fees in rental markets and teaser rates on loans nevertheless firms may benefit from consumers losing their overconfidence

lifecycle economic analysis of biofuels accounting for economic substitution in policy assessment this paper develops a lifecycle economic analysis lcea model that integrates endogenous input substitution into the standard lifecycle analysis lca of biofuel that typically assumes fixed proportions production we use the lcea model to examine impacts of a pure carbon tax and a revenue neutral tax subsidy policy on lifecycle greenhouse gas emissions from cellulosic ethanol using forest residues as feedstock in washington state in a model allowing for input substitution in the cellulosic ethanol feedstock conversion and transportation process we consider energy source substitution woody biomass for coal in the cellulosic ethanol conversion plant and biodiesel for diesel in feedstock production and feedstock and ethanol transportation as well as substitution of capital and labor for energy in all stages of the lifecycle we find that ignoring endogenous input substitution by using standard lca leads to substantial underestimation of the impact of carbon tax policies on carbon emissions both tax policies can substantially reduce carbon emissions by inducing substitution among inputs the revenue neutral tax subsidy policy reduces emissions more effectively than the carbon tax policy for carbon tax rates currently in place throughout most of the world it stimulates substitution of woody biomass for coal and biodiesel for diesel at much lower tax rates when accompanied by corresponding subsidies for reduced emissions from renewable sources

the use and abuse of meta analysis in environmental and natural resource economics an assessment motivated by the 2006 report of a work group appointed by the environmental protection agency epa this paper examines the present state of meta analysis in environmental economics and offers recommendations for its future use to this end we summarize and assess 140 meta analyses from 125 published and unpublished studies covering 17 topical categories in environmental and resource economics first we provide several generic meta analysis models as reference points and discuss major estimation issues five econometric issues are identified as part of a complete analysis 1 sample selection criteria 2 basic data summary 3 primary data heterogeneity 4 heteroskedasticity and 5 non independence of multiple observations from primary studies second a tabular summary is presented for the 140 meta analyses with respect to estimation methods third a narrative summary is presented for 19 meta analyses including the three value of statistical life studies examined by the epa work group and one analysis from each of 16 other categories fourth we offer a set of best practice guidelines for future meta analyses in this and other areas of economics last the paper comments on the use of meta analytic methods for benefit transfers of environmental values

value function approximation in the presence of uncertainty and inequality constraints an application to the demand for credit cards abstract we present an algorithm for approximating the solution to discrete time stochastic dynamic programs with inequality constraints the algorithm exploits the state preference approach to choice under uncertainty to reduce the dimensionality of the state space and polynomial approximation to improve computational efficiency it is particularly useful in financial applications involving liquidity and credit constraints and more than one asset the algorithm provides information about the derivatives of the value function and therefore risk aversion along with asset demands

borrowing high versus borrowing higher price dispersion and shopping behavior in the u s credit card market we document substantial cross individual dispersion in u s credit card borrowing costs even after controlling for borrower risk and card characteristics that remaining dispersion arises because cross lender pricing heterogeneity generates dispersion in annual percentage rate apr offers to borrowers and borrowers vary in shopping intensity our empirics match administrative data to self reported card shopping intensity and use instruments suggested by fair lending law to account for the endogeneity between aprs and search the results show that shoppers versus nonshoppers pay aprs as different as those paid by borrowers in the best versus worst credit score deciles we discuss implications for policy and practice

consumer biases and mutual ownership abstract we show how ownership of the firm by its customers as well as nonprofit status can prevent firms from using contractual terms that take advantage of consumer biases by eliminating an outside residual claimant with control over the firm these alternatives to investor ownership reduce the incentive of the firm to offer such terms however customers who are unaware of their behavioral biases may fail to recognize this advantage of non investor owned firms we present evidence from the consumer financial services market that supports our theory comparing contract terms we find that mutually owned firms offer lower penalties such as default interest rates and higher up front prices such as introductory interest rates than do investor owned firms however consumers most vulnerable to these penalties are no more likely to use mutually owned firms

risk based pricing of interest rates for consumer loans abstract by focusing on observable default risk s role in loan terms and the subsequent consequences for household behavior this paper shows that lenders increasingly used risk based pricing of interest rates in consumer loan markets during the mid 1990s it tests three resulting predictions first the premium paid per unit of risk should have increased over this period second debt levels should have reacted accordingly third fewer high risk households should have been denied credit further contributing to the interest rate spread between the highest and lowest risk borrowers for people obtaining loans the premium paid per unit of risk did indeed become significantly larger after the mid 1990s for example for a 0 01 increase in the probability of bankruptcy the corresponding interest rate increase tripled for first mortgages doubled for automobile loans and rose nearly six fold for second mortgages additionally changes in borrowing levels and debt access reflected these new pricing practices particularly for secured debt borrowing increased most for the low risk households who saw their relative borrowing costs fall furthermore while very high risk households gained expanded access to credit the increases in their risk premiums implied that their borrowing as a whole either rose less or sometimes fell

permanent income hypothesis in emerging markets some brazilian evidence abstract this paper uses a dataset from one of the largest credit card issuers in brazil to investigate the extent of credit constraints for one of the world s largest emerging market economies in order to deal with the endogeneity problem from an observational dataset an identification strategy based on the issuer actual policies was used to better identify the long run effects of a credit card limit increase on debt the results point to a long run effect of credit limit on credit card debts of 0 1144 a similar size to the ones found in gross and souleles 2001 this value indicates the permanent income hypothesis is rejected for this sample and some evidence supporting a variation of buffer stock behavior is found furthermore results indicate the degree of heterogeneity in effects is much higher than similar results for developed countries lending credence to the conclusion credit constraints are much stronger for lower income groups this conclusion is in line to previous studies in brazil such as de lucinda and vieira 2014

retrospectives an early supply side demand side controversy petty law cantillon early modern europe in the late seventeenth and early eighteenth centuries witnessed an unprecedented increase in the rate of economic growth and governments entertained a wide range of proposals aimed at developing and harnessing foreign trade and emerging financial markets in his magisterial survey of foreign trade doctrine titled studies in the theory of international trade 1936 jacob viner pointed out that enlightened authors of that time were often nonbullionist mercantilists they favored export promotion and import reduction not on the grounds that it would lead to an accumulation of gold but on the grounds that it would increase trade and employment my focus here is on how some key economists of this time period william petty john law and richard cantillon adumbrated disputes between supply side and demand side macroeconomics that have continued to the present day

the real costs of credit access evidence from the payday lending market using geographic differences in the availability of payday loans i estimate the real effects of credit access among low income households payday loans are small high interest rate loans that constitute the marginal source of credit for many high risk borrowers i find no evidence that payday loans alleviate economic hardship to the contrary loan access leads to increased difficulty paying mortgage rent and utilities bills the empirical design isolates variation in loan access that is uninfluenced by lenders location decisions and state regulatory decisions two factors that might otherwise correlate with economic hardship measures further analysis of differences in loan availability over time and across income groups rules out a number of alternative explanations for the estimated effects counter to the view that improving credit access facilitates important expenditures the results suggest that for some low income households the debt service burden imposed by borrowing inhibits their ability to pay important bills copyright 2011 oxford university press

competitive price discrimination we model firms as supplying utility directly to consumers the equilibrium outcome of competition in utility space depends on the relationship u between profit and average utility per consumer public policy constraints on the deals firms may offer affect equilibrium outcomes via their effect on u f rom this perspective we examine the profit utility and welfare implications of price discrimination policies in an oligopolistic framework we also show that an equilibrium outcome of competitive nonlinear pricing when consumers have private information about their tastes is for firms to offer efficient two part tariffs

how effective are rewards programs in promoting payment card usage empirical evidence card issuers have mainly relied on rewards programs as their main strategy to increase usage however there is scarce evidence on the effectiveness of these programs this paper is addressing two topics which could have important managerial and public policy implications i it estimates the impact of rewards on the use of cards and ii it quantifies their economic effects in terms of the cash substitution we find that rewards may significantly modify choice for card payments their economic impact also varies significantly across types of rewards and merchant activities additionally rewards seem to be more effective for debit cards

unplanned purchases and retail competition i propose a framework in which consumers have biased beliefs about their future purchase probabilities leading them to make unplanned purchases us ing this framework i examine the phenomenon of below cost pricing and the welfare eects of banning it when the market is covered a ban on below cost pricing raises social surplus although consumers need not gain they are only guaranteed to ben et if the market is perfectly competitive when the market is not covered a ban always hurts at least some consumers also there is a pro competitive justica tion for the observation that larger rms sometimes charge below cost on the core product lines of smaller rms consumer bias is crucial for this justication multi product retailers sometimes sell certain products beneath cost with the hope of at tracting additional customers who will also buy other higher margin items this practice often referred to as loss leading is controversial with below cost pricing having been banned in a number of countries including belgium germany france and ireland and in approximately half of all us states 1 many us cities also have such prohibitions in this article i examine the welfare consequences of prohibitions on below cost pricing in a market where multi product retailers compete for boundedly rational consumers who practice one stop shopping that is visit at most one store when rivals are symmetric and the market is covered so that all consumers shop a ban on loss leading raises social surplus but when the market is not covered a ban presents a social welfare tradeo fewer consumers choose to shop although those who do generate higher levels of social surplus perhaps surprisingly for those consumers who shop both before and after a ban a ban is guaranteed to make them better o if the market is perfectly competitive but otherwise may harm them taken together these results indicate that it is simplistic to argue that by limiting the scope of competition below cost pricing bans must hurt consumers and society but i also assess below cost pricing laws in the presence of asymmetric competition as when a large rm with a full product line competes against a small rm with a limited product

beyond publication bias abstract this review considers several meta regression and graphical methods that can differentiate genuine empirical effect from publication bias publication selection exists when editors reviewers or researchers have a preference for statistically significant results because all areas of empirical research are susceptible to publication selection any average or tally of significant insignificant studies is likely to be biased and potentially misleading meta regression analysis can see through the murk of random sampling error and selected misspecification bias to identify the underlying statistical structures that characterize genuine empirical effect meta significance testing and precision effect testing pet are offered as a means to identify empirical effect beyond publication bias and are applied to four areas of empirical economics research minimum wage effects union productivity effects price elasticities and tests of the natural rate hypothesis

implications of rational inattention abstract a constraint that actions can depend on observations only through a communication channel with finite shannon capacity is shown to be able to play a role very similar to that of a signal extraction problem or an adjustment cost in standard control problems the resulting theory looks enough like familiar dynamic rational expectations theories to suggest that it might be useful and practical while the implications for policy are different enough to be interesting

interfuel substitution a meta analysis interfuel substitutability has been of longstanding interest to the energy economics and policy community however no quantitative meta analysis has yet been carried out of this literature this paper fills this gap by analyzing a broad sample of studies of interfuel substitution in the industrial sector manufacturing industry or subindustries or macro economy of a variety of developed and developing economies publication bias is controlled for by including the primary study sample size in the meta regression results for the shadow elasticities of substitution between coal oil gas and electricity for forty six primary studies show that at the level of the industrial sector there are easy substitution possibilities between all the fuel pairs with the exception of gas electricity and coal electricity substitution possibilities seem more constrained at the macro level and less constrained in sub industries estimates also vary across countries publication bias does not seem to be present but model and data specification issues very significantly affect the estimates derived by each individual study estimates from cross section regressions are generally largest fixed effects panel estimates intermediate in magnitude and time series estimates are mostly much smaller econometric research suggests that the fixed effects estimates are likely the best among the existing studies though biased downwards

book reviewjohn law economic theorist and policy maker by antoin e murphy oxford clarendon press 1997 pp 3921xiv 75 00

sales talk cancellation terms and the role of consumer protection this paper analyses contract cancellation and product return policies in mar kets in which sellers advise customers about the suitability of their oering when customers are fully rational it is optimal for sellers to oer the right to cancel or return on favorable terms a generous return policy makes the seller s cheap talk at the point of sale credible this observation provides a possible explanation for the excess refund puzzle and also has implications for the management of customer reviews when customers are credulous instead sellers have an incentive to set unfavorable terms to exploit the in ated beliefs they induce in their customers the imposition of a minimum statutory standard even if it is not binding can improve welfare and consumer surplus when at least some customers are credulous in con trast competition policy reduces contractual ine ciencies with rational customers but it is not eective with credulous customers

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

the absent minded driver abstract the example of the absent minded driver was introduced by piccione and rubinstein in the context of games and decision problems with imperfect recall they claim that a paradox or inconsistency arises when the decision reached at the planning stage is compared with that at the action stage though the example is provocative and worth having their analysis is questionable a careful analysis reveals that while the considerations at the planning and action stages do differ there is no paradox or inconsistency journal of economic literatureclassification numbers d81 c72

regulate one service tame the entire market credit cards in turkey abstract in credit card markets banks provide both payment and credit services two regulations were recently enacted in the turkish credit card market one on payment services in 2005 and the other on credit services in 2006 by employing the well known panzar and rosse 1982 panzar and rosse 1987 method and a unique quarterly data set for 21 turkish banks between 2002 and 2008 we investigate the extent of banks market power in the turkish credit card market before and after the regulations unlike most of the existing literature which considers competition and regulation for either credit or payment services and ignores the externalities between them we consider the entire market by taking both services into account fixed effects estimations reveal that banks enjoyed collusive oligopoly power before the regulations although the first regulation did not have much impact the second led to rises in both banks total revenues and competition in the entire market

artificial compatibility barriers to entry and frequent flyer programs if supplier firms can discriminate between buyers agents acting on behalf of employers principals and those making purchases for themselves then these firms may be able to create demand side entry barriers by creating what may be called artificial compatibility between otherwise unrelated goods or services even if there are no differences in costs between incumbent and potential entrant there will be an incentive to offer in kind inducements to agents these inducements may lead to entry barriers and their use may be a nash equilibrium we argue that frequent flyer programs are instances of the creation of such artificial compatibility

when consumers do not make an active decision dynamic default rules and their equilibrium effects abstract dynamic defaults for recurring purchases determine what happens to consumers enrolled in a product or service who take no action at a decision point consumers may face automatic renewal automatic switching or non purchase defaults privately optimal dynamic defaults depend on the contributions of adjustment costs versus costless opt out frictions both produce inertia under renewal defaults but differ under non renewal defaults defaults have equilibrium effects on pricing by changing the elasticity of repeat demand socially optimal defaults depend on firms pricing responses as well more elastic repeat demand restrains price increases on repeat customers and can reduce inefficient switching

meta regression analysis a quantitative method of literature surveys abstract pedagogically literature reviews are instrumental they summarize the large literature written on a particular topic give coherence to the complex often disparate views expressed about an issue and serve as a springboard for new ideas however literature surveys rarely establish anything approximating unanimous consensus ironically this is just as true for the empirical economic literature to harmonize this dissonance we offer a quantitative methodology for reviewing the empirical economic literature meta regression analysis mra is the regression analysis of regression analyses mra tends to objectify the review process it studies the processes that produce empirical economic results as though they were any other social scientific phenomenon mra provides a framework for replication and offers a sensitivity analysis for model specification in this brief essay we propose a new method of reviewing economic literature mra and discuss its potential

famous first bubbles t he jargon of economics and finance contains numerous colorful expressions to denote a market determined asset price at odds with any reasonable economic explanation such words as tulip mania bubble chain letter ponzi scheme panic crash and financial crisis immediately evoke images of frenzied and probably irrational speculative activity many of these terms have emerged from specific speculative episodes which have been sufficiently frequent and important that they underpin a strong current belief among economists that key capital markets sometimes generate irrational and inefficient pricing and allocational outcomes before economists relegate a speculative event to the inexplicable or bubble category however we must exhaust all reasonable economic explanations while such explanations are often not easily generated due to the inherent complexity of economic phenomena the business of economists is to find clever fundamental market explanations for events and our methodology should always require that we search intensively for market fundamental explanations before clutching the bubble last resort thus among the reasonable or market fundamental explanations i would include the perception of an increased probability of large returns the perception might be triggered by genuine economic good news by a convincing new economic theory about payoffs or by a fraud launched by insiders acting strategically to trick investors it might also be triggered by uninformed market participants correctly inferring changes in the distribution of dividends by observing price movements generated by the trading of informed insiders while some of these perceptions might

a joint optimal pricing rebate value and lot sizing model delayed incentives in the form of mail in cash rebates are very popular among manufacturers and more recently among retailers one of the main advantages of rebates is that while they increase demand a small proportion of consumers redeem them in this paper we formulate and solve models for jointly determining the optimal price rebate face value and the optimal order quantity for a price and rebate sensitive deterministic demand the models show that under realistic conditions offering rebates can have significant pricing and inventory policy implications and can lead to a significant increase in profit

nonlinear pricing with random participation the canonical selection contracting programme takes the agent s participation decision as deterministic and finds the optimal contract typically satisfying this constraint for the worst type upon weakening this assumption of known reservation values by introducing independent randomness into the agents outside options we find that some of the received wisdom from mechanism design and nonlinear pricing is not robust and the richer model which allows for stochastic participation affords a more general empirical specification we develop a multidimensional methodology for addressing this class of problems providing two important applications to nonlinear pricing first with nonlinear pricing by a monopolist the familiar nodistortion at the top result persists but in tandem with the surprising conclusion that there is either no distortion at the bottom or bunching second in a simple model of product differentiated duopolists competing with nonlinear pricing we show that generally the duopoly outcome is qualitatively similar to the monopoly outcome however when marginal costs are symmetric and competition is sufficiently intense distortions disappear and the equilibrium outcome takes a remarkably simple form efficient quality allocations with cost plus fee pricing

trade liberalization and agricultural chemical use united states and mexico to anticipate the likely effects of recent trade agreements with mexico on the environment and food safety this paper examines changes in agricultural chemical use econometric estimation and simulation suggest that the combined effects of the north american free trade agreement nafta economic growth research investment and farm policy are expected to increase chemical usage substantially in the united states and undoubtedly lead to greater groundwater contamination in mexico the expected effects are a substantial increase in fertilizer use but a decrease in pesticide use increases in private research investment are expected to increase the use of both types of chemicals but increases in public research investment in the united states are not

shrouded attributes consumer myopia and information suppression in competitive markets bayesian consumers infer that hidden add on prices e g the cost of ink for a printer are likely to be high prices if consumers are bayesian firms will not shroud information in equilibrium however shrouding may occur in an economy with some myopic or unaware consumers such shrouding creates an inefficiency which firms may have an incentive to eliminate by educating their competitors customers however if add ons have close substitutes a curse of debiasing arises and firms will not be able to profitably debias consumers by unshrouding add ons in equilibrium two kinds of exploitation coexist optimizing firms exploit myopic consumers through marketing schemes that shroud high priced add ons in turn sophisticated consumers exploit these marketing schemes it is not possible to profitably drive away the business of sophisticates it is also not possible to profitably lure either myopes or sophisticates to nonexploitative firms we show that informational shrouding flourishes even in highly competitive markets even in markets with costless advertising and even when the shrouding generates allocational inefficiencies

consumer myopia standardization and aftermarket monopolization abstract in this paper i show that the standard bertrand competition argument does not apply when firms compete for myopic consumers who optimize period by period i develop the model in the context of aftermarket with overlapping generations of consumers simultaneous product offerings in the primary market and aftermarket establishes a price floor for the primary good this constraint prevents aftermarket rents from being dissipated by the primary market competition duopoly firms earn positive profits despite price competition with undifferentiated products nonetheless government interventions to reinforce aftermarket competition such as a standardization requirement may lead to the partial collapse of the primary market

bunching at the kink implications for spending responses to health insurance contracts abstract a large literature in empirical public finance relies on bunching to identify a behavioral response to non linear incentives and to translate this response into an economic object to be used counterfactually we conduct this type of analysis in the context of prescription drug insurance for the elderly in medicare part d where a kink in the individual s budget set generates substantial bunching in annual drug expenditure around the famous donut hole we show that different alternative economic models can match the basic bunching pattern but have very different quantitative implications for the counterfactual spending response to alternative insurance contracts these findings illustrate the importance of modeling choices in mapping a compelling reduced form pattern into an economic object of interest

on the choice offunctional forms in agricultural production analysis empirical results obtained by an analyst may depend on prior choice of functional form three alternative parametric specifications of the cost function are considered these are generalized leontief translog and normalized quadratic functions performance of these functional forms is evaluated by allen elasticities of substitution biases in technical change and some theory based hypotheses all three parametric specifications yielded mixed results together empirical results reinforce the need for model specification searches

missed sales and the pricing of ancillary goods firms often sell a basic good as well as ancillary ones hold up concerns have led to ancillary good regulations such as transparency and price caps the hold up narrative however runs counter to evidence in many retail settings where ancillary good prices are set below cost e g free shipping or limited card surcharging in countries where the no surcharge rule was lifted we argue that the key to unifying these conflicting narratives is that the seller may absorb partly or fully the ancillary good s cost so as not to miss sales on the basic good a supplier with market power on the ancillary good market then takes advantage of cost absorption and jacks up its wholesale price hold ups occur only when consumers are initially uninformed or naive about the drip price and shopping costs are high the price of the basic good then acts as a signal of the drip price since a high markup on the basic good makes the firm more wary of missed sales regardless of whether consumers are informed uninformed but rational or naive mandating price transparency and banning loss making on the ancillary good leads to i an efficient consumption of the ancillary good and ii a reduction of its wholesale price generating strict welfare gains

license to cheat voluntary regulation and ethical behavior although monitoring and regulation can be used to combat socially costly unethical conduct their intended targets can often avoid regulation or hide their behavior this surrenders at least part of the effectiveness of regulatory policies to firms and individuals decisions to voluntarily submit to regulation we study individuals decisions to avoid monitoring or regulation and thus enhance their ability to engage in unethical conduct we conduct a laboratory experiment in which participants engage in a competitive task and can decide between having the opportunity to misreport their performance or having their performance verified by an external monitor to study the effect of social factors on the willingness to be subject to monitoring we vary whether participants make this decision simultaneously with others or sequentially as well as whether the decision is private or public our results show that the opportunity to avoid being submitted to regulation produces more unethical conduct than situati

estimating substitution and expansion effects using a profit function framework this study reports a first attempt to derive all the relevant information with respect to the structure of production of an industry using knowledge of only a profit function using estimates of a profit function for canadian agriculture a procedure to separate substitution and expansion effects for both inputs and outputs was implemented information concerning net input and output substitution and complementarity possibilities were obtained the most important empirical results suggest that the hypothesis of nonjoint production of crop and animal outputs in canadian agriculture cannot be rejected and that hired and operator labor are complements rather than substitutes

the timing of choice enhancing policies abstract recent studies investigate policies motivating consumers to make an active choice as a way to protect unsophisticated consumers we analyze the optimal timing of such choice enhancing policies when a firm can strategically react to them in the model a firm provides a contract with automatic renewal we show that a policy intending to enhance consumers choices when they choose a contract can be detrimental to welfare by contrast a choice enhancing policy at the time of contract renewal increases welfare more robustly our results highlight that policies should be targeted in timing to the actual choice inefficiency

inferior products and profitable deception we analyse conditions facilitating profitable deception in a simple model of a competitive retail market firms selling homogenous products set anticipated prices that consumers understand and additional prices that naive consumers ignore unless revealed to them by a firm where we assume that there is a binding floor on the anticipated prices our main results establish that bad products those with lower social surplus than an alternative tend to be more reliably profitable than good products specifically 1 in a market with a single socially valuable product and sufficiently many firms a deceptive equilibrium in which firms hide additional prices does not exist and firms make zero profits but perversely 2 if the product is socially wasteful then a profitable deceptive equilibrium always exists furthermore 3 in a market with multiple products since a superior product both diverts sophisticated consumers and renders an inferior product socially wasteful in comparison it guarantees that firms can profitably sell the inferior product by deceiving consumers we apply our framework to the mutual fund and credit card markets arguing that it explains a number of empirical findings regarding these industries

choice and procrastination author s o donoghue ted rabin matthew abstract recent models of procrastination due to self control problems assume that a procrastinator considers just one option and is unaware of her self control problems we develop a model where a person chooses from a menu of options and is partially aware of her self control problems this menu model replicates earlier results and generates new ones a person might forego completing an attractive option because she plans to complete a more attractive but never to be completed option hence providing a non procrastinator additional options can induce procrastination and a person may procrastinate worse pursuing important goals than unimportant ones

the effects of regulating hidden add on costs we examine the welfare effects of price and disclosure regulation in a model where firms can shroud add on costs such as penalty fees for consumer financial products such regulation can increase or decrease welfare even when there are no direct costs there are however strong complementarities between price controls and disclosure mandates conditional on disclosure being mandated price controls always weakly increase welfare and conditional on prices being sufficiently constrained disclosure mandates always weakly increase welfare

cellular service demand biased beliefs learning and bill shock by april 2013 the fcc s recent bill shock agreement with cellular carriers requires consumers be notied when exceeding usage allowances will the agreement help or hurt consumers to answer this question we estimate a model of consumer plan choice usage and learning using a panel of cellular bills our model predicts that the agreement will lower average consumer welfare by 2 per year because rms will respond by raising monthly fees our approach is based on novel evidence that consumers are inattentive to past usage meaning that bill shock alerts are informative and advances structural modeling of demand in situations where multipart taris induce marginal price uncertainty additionally our model estimates show that an

consumer inattention and bill shock regulation for many goods and services such as electricity health care cellular phone service debit card transactions or those sold with loyalty discounts the price of the next unit of service depends on past usage as a result consumers who are inattentive to their past usage but are aware of contract terms may remain uncertain about the price of the next unit i develop a model of inattentive consumption derive equilibrium pricing when consumers are inattentive and evaluate bill shock regulation requiring firms to disclose information that substitutes for attention when inattentive consumers are sophisticated but heterogeneous in their expected demand bill shock regulation reduces social welfare in fairly competitive markets which may be the effect of the federal communication commission s recent bill shock agreement if some consumers are attentive while others naively fail to anticipate their own inattention however then bill shock regulation increases social welfare and can benefit consumers hence requiring zero balance alerts in addition to the federal reserve s new opt in rule for debit card overdraft protection may benefit consumers

futile attempts at self control we investigate costly yet futile attempts at self control when consumption of a harmful product has a binary breakdown no breakdown nature and individuals tend to underestimate their need for self control considering time inconsistent preferences as well as temptation disutility we show that becoming more sophisticated can decrease welfare and investigate what kind of mistaken beliefs lead to low welfare with time inconsistent preferences being close to perfectly understanding one s preferences but assigning zero probability to true preferences induces the worst outcome jel d03 d11 d91

impacts of technological change on factor substitution between energy and other inputs within us agriculture 1950 79 abstract past efforts to estimate elasticities of substitution between inputs both in and out of agriculture have usually made use of a single data set to provide the elasticities between the input pairs and have led to highly conflicting results particularly with respect to the substitution between capital or machinery and energy this study reveals that the elasticity of substitution between a number of input pairs in agriculture can vary by substantial amounts depending on the time period used for the estimation energy in agriculture which was a complement for machinery in the 1950s was a substitute by the 1970s

publication bias in the economic freedom and economic growth literature abstract the impact of institutions on economic performance has attracted significant attention from researchers as well as from policy reformers a rapidly growing area in this literature is the impact of economic freedom on economic growth the aim of this paper was to explore publication bias in this literature by means of traditional funnel plots meta significance testing as well as by bootstrapping these meta significance tests when all the available estimates are combined and averaged there seems to be evidence of a genuine and positive economic freedom economic growth effect however it is also shown that the economic freedom economic growth literature is tainted strongly with publication bias the existence of publication bias makes it difficult to identify the magnitude of the genuine effect of economic freedom on economic growth the paper explores the differences between aggregate and disaggregate measures of economic freedom and shows that selection effects are stronger when aggregate measures are used

risk management of non maturing liabilities abstract risk management of non maturing liabilities is a relatively unstudied issue of significant practical importance non maturing liabilities include most of the traditional deposit accounts like demand deposits savings accounts and short time deposits and form the basis of the funding of depository institutions therefore the asset and liability management of depository institutions depends crucially on an accurate understanding of the liquidity risk and interest rate risk profile of these deposits in this paper we propose a stochastic three factor model as general quantitative framework for liquidity risk and interest rate risk management for non maturing liabilities it consists of three building blocks market rates deposit rates and deposit volumes we give a detailed model specification and present algorithms for simulation and calibration our approach to liquidity risk management is based on the term structure of liquidity a concept which forecasts for a specified period and probability what amount of cash is available for investment for interest rate risk management we compute the value the risk profile and the replicating bond portfolio of non maturing liabilities using arbitrage free pricing under a variance minimizing measure the proposed methodology is demonstrated by means of a case study the risk management of savings accounts

naivete based discrimination we initiate the study of naivete based discrimination the practice of conditioning offers on external information about consumers naivete knowing that a consumer is naive increases a monopolistic or competitive firm s willingness to generate inefficiency to exploit the consumer s mistakes so naivete based discrimination is not pareto improving can be pareto damaging and often lowers total welfare when classical preference based discrimination does not moreover the effect on total welfare depends on a hitherto unemphasized market feature the extent to which the exploitation of naive consumers distorts trade with different types of consumers if the distortion is homogeneous across naive and sophisticated consumers then under an arguably weak and empirically testable condition naivete based discrimination lowers total welfare in contrast if the distortion arises only for trades with sophisticated consumers then perfect naivete based discrimination maximizes social welfare although imperfect discrimination often lowers welfare if the distortion arises only for trades with naive consumers then naivete based discrimination has no effect on welfare we identify applications for each of these cases in our primary example a credit market with present biased borrowers firms lend more than is socially optimal to increase the amount of interest naive borrowers unexpectedly pay creating a homogeneous distortion the condition for naivete based discrimination to lower welfare is then weaker than prudence

on the economics of repeat buying this article presents a theory of such phenomena as coupons valid for the next purchase of a good and high initiation fees for clubs in these cases the price of a nondurable good is lowered for second time buyers we show here that this can be explained by a model in which a monopolist sells a good and the buyers are uncertain of their taste for the product but not of the quality of the product per se

information sharing in credit markets we present a model with adverse selection where information sharing between lenders arises endogenously lenders incentives to share information about borrowers are positively related to the mobility and heterogeneity of borrowers to the size of the credit market and to advances in information technology such incentives are instead reduced by the fear of competition from potential entrants in addition information sharing increases the volume of lending when adverse selection is so severe that safe borrowers drop out of the market these predictions are supported by international and historical evidence in the context of the consumer credit market a large body of literature on credit markets has shown that asymmetric information may prevent the efficient allocation of lending leading to credit rationing e g jaffee and russell 1976 stiglitz and weiss 1981 or to a wedge between lending and borrowing rates e g king 1986 in this literature informational asymmetries are taken to be exogenous lenders fail to observe some relevant characteristic or action of potential borrowers and have no way of learning about it in some countries however lenders can improve their knowledge about new customers by exchanging information with other lenders through information brokers generally known as credit bureaus the latter collect file and distribute the information voluntarily supplied by their members and operate on the principle of reciprocity lenders who do not provide data are denied access to the bureau s files in other countries instead these institutions do not exist the literature offers no guide to identify the factors that lead to endogenous communication between lenders this paper is an attempt to fill the gap information sharing is important for a number of reasons it may increase the degree of competitiveness within credit markets vives 1990 improve

the intertemporal dynamics of consumer lock in this article examines how dynamic changes in information cost structure and time preferences affect consumers search and switching behavior over time and lead to lock in the information cost structure is conceptualized as a trade off of initial setup costs and ongoing usage costs lock in is defined as consumers decreased propensity to search and switch after an initial investment which is determined both by a preference to minimize immediate costs and by an inability to anticipate the impact of future switching costs the results of three experiments support the proposed mechanism experiment 1 shows that a small initial investment is sufficient to produce lock in experiment 2 shows that the results of a prior investment on lock in are not due to psychological commitment but to a shift in relative costs of incumbent and new options experiment 3 shows that respondents fail to anticipate how their prior investment will lock them in

competition and pricing in the credit card market many credit card issuers charge fixed rates that remain the same for three to five years while the rest charge variable rates that are indexed to market rates the presence of these two distinct rate types forces prices at firms selling an otherwise identical product to move asynchronously variable rates move one for one with the index while fixed rates stay constant empirical and theoretical analysis shows that this pricing structure provides an explanation for the simultaneous yet seemingly contradictory existence of high rate cost margins and aggressive non price competition for new customers a phenomenon that existed in the credit card market in the early 1990s

price and income elasticities of residential water demand a meta analysis this article presents a meta analysis of variations in price and income elasticities of residential water demand meta analysis constitutes an adequate tool to synthesize research results by means of an analysis of the variation in empirical estimates reported in the literature we link the variation in estimated elasticities to differences in theoretical microeconomic choice approaches differences in spatial and temporal dynamics as well as differences in research design of the underlying studies the occurrence of increasing or decreasing block rate systems turns out to be important with respect to price elasticities the use of the discrete continuous choice approach is relevant in explaining observed differences

the failure of competition in the credit card market the bank credit card market containing 4 000 firms and lacking regulatory barriers casually appears to be a hospitable environment for the model of perfect competition nevertheless this article reports that credit card interest rates have been exceptionally sticky relative to the cost of funds moreover major credit card issuers have persistently earned from three to five times the ordinary rate of return in banking during the periods 1983 88 the failure of the competitive model appears to be partly attributable to consumers making credit card choices without taking account of the very high probability that they will pay interest on their outstanding balances copyright 1991 by american economic association

are loyalty rewarding pricing schemes anti competitive abstract many economists and policy analysts seem to believe that loyalty rewarding pricing schemes like frequent flyer programs tend to reinforce firms market power and hence are detrimental to consumer welfare the existing academic literature has supported this view to some extent in contrast we argue that these programs are business stealing devices that tend to enhance competition in the sense of generating lower average transaction prices and higher consumer surplus in highly competitive environments this result is robust to alternative specifications of the firm commitment power and demand structures however it could be reversed if the number of firms is sufficiently small and if firms are restricted to use program designs with sufficiently weak commitment capacity

nudges that hurt those already hurting distributional and unintended effects of salience nudges abstract nudges are becoming increasingly popular policy tools yet distributional effects of nudges are largely unknown we first design an economic laboratory experiment to examine the incidence of an opportunity cost reminder nudge a salience nudge designed to curb spending while accounting for heterogeneity in emotional responses specifically the pain of paying pain of paying is optimal for unconflicted consumers but too low for spendthrifts and too high for tightwads causing sub optimal spending our empirical results imply the nudge increases pain of paying for tightwads thereby reducing spending by tightwads who already spend too little while it entirely fails to reduce the spending of those who would have benefited from a spending reduction spendthrifts overall the nudge therefore might reduce consumer welfare we next examine if the adverse impact of the opportunity cost reminder nudge is explained by a general tendency for all nudges to exacerbate peoples underlying spending preferences we specifically test whether a salience nudge designed to boost spending correspondingly adversely affects spendthrifts we unexpectedly find that subjects perceive the spending booster nudge as a spending reminder which again reduces spending by tightwads only while not affecting spending by the other consumer types our results highlight two important aspects of salience nudges given the complexity of consumer emotions and information processing salience nudges can have undesired welfare effects and the direction of their impact may be the opposite of what was intended

reprint of bunching at the kink implications for spending responses to health insurance contracts abstract a large literature in empirical public finance relies on bunching to identify a behavioral response to non linear incentives and to translate this response into an economic object to be used counterfactually we conduct this type of analysis in the context of prescription drug insurance for the elderly in medicare part d where a kink in the individual s budget set generates substantial bunching in annual drug expenditure around the famous donut hole we show that different alternative economic models can match the basic bunching pattern but have very different quantitative implications for the counterfactual spending response to alternative insurance contracts these findings illustrate the importance of modeling choices in mapping a compelling reduced form pattern into an economic object of interest

determining consumers discount rates with field studies abstract because utility profits state transitions and discount rates are confounded in dynamic models discount rates are typically fixed for the purpose of identification the authors propose a strategy of identifying discount rates the identification rests on imputing the utility profits using decisions made in a context in which the future is inconsequential the objective function is concave and the decision space is continuous they then use these utilities profits to identify discount rates in contexts in which dynamics become material the authors exemplify this strategy using a field study in which cell phone users transitioned from a linear to a three part tariff pricing plan they find that the estimated discount rate corresponds to a weekly discount factor 90 lower than the value typically assumed in empirical research 995 when using a standard 995 discount factor they find that the price coefficient is underestimated by 16 moreover the predicted intertemporal substitution pat

market regulation of voluntary add on contracts abstract this paper analyzes contract choices and the effectiveness of consumer protection policies when firms can offer voluntary add on insurance for their products we develop a model in which a base product can be sold together with a voluntary extended warranty contract that insures consumers against the risk of product breakdown some consumers do not pay attention to extended warranties before making base product choices but overestimate the value of such warranties at the point of sale under retail competition the consumers option to buy multiple base products can endogenously create a base price floor that may prevent firms from redistributing the full warranty profits via loss leadership inducing competition in the warranty market weakly increases consumer welfare and weakly outperforms a minimum warranty standard which can even reduce consumer surplus the results are consistent with the effects of recent changes regarding extended warranty regulation by uk legislators

a model of add on pricing this paper examines competitive price discrimination with horizontal and vertical taste differences consumers with higher valuations for quality are assumed to have stronger brand preferences two models are considered a standard competitive price discrimination model in which consumers observe all prices and an add on pricing game in which add on prices are naturally unobserved and firms may advertise a base good at a low price in hopes of selling add ons at high unadvertised prices in the standard game price discrimination is self reinforcing the model sometimes has both equilibria in which the firms practice price discrimination and equilibria in which they do not the analysis of the add on pricing game focuses on the chicago school argument that profits earned on add ons will be competed away via lower prices for advertised goods a conclusion is that add on practices can raise equilibrium profits by creating an adverse selection problem that makes price cutting unappealing although profitable when jointly adopted using add on pricing is not individually rational in a simple extension with endogenous advertising practices and costless advertising several models that could account for add on pricing are discussed

dynamic input demand an application to agriculture a theoretically consistent analytical framework for examining dynamic agricultural input demand is developed and applied results from duality theory on restricted variable profit functions are incorporated into a long run dynamic optimization framework input use is affected by external adjustment costs which permits sluggish factor adjustment

exploiting naivete about self control in the credit market we develop a model of the credit market where competitive lenders oer long term contracts specifying a non linear schedule of possible repayment schedules to borrowers who may dier both in their taste for immediate gratication and their prior beliefs about that taste the equilibrium contract to a borrower with given beliefs is discontinuous it features an advantageous option involving fast repayment and a penalty for deviating and repaying later these predictions seem to resemble some salient features of many credit card and mortgage contracts for fully sophisticated borrowers the discontinuity acts as a commitment device and yields fast repayment but all other borrowers even those with an arbitrarily small amount of naivete end up delaying repayment despite the penalty and receive little benet from commitment furthermore because they believe they will repay early they underestimate the cost of credit and hence borrow too much non sophisticated borrowers cross subsidize sophisticated borrowers while sophisticated borrowers discipline rms by preventing very exploitative contracts we identify natural conditions under which the above results obtain even if

information provision and consumer behavior a natural experiment in billing frequency abstract in this study i estimate a causal effect of increased billing frequency on consumer behavior i exploit a natural experiment in which residential water customers switched exogenously from bimonthly to monthly billing customers increase consumption by 3 5 5 in response to more frequent information this result is reconciled in models of price and quantity uncertainty where increases in billing frequency reduce the distortion in consumer perceptions using treatment effects as sufficient statistics i calculate consumer welfare gains equivalent to 0 5 1 of annual water expenditures heterogeneous treatment effects suggest increases in outdoor water use

multipart tariffs and bounded rationality an experimental analysis of mobile phone plan choices multipart tariff structures add to the computational challenges in choosing mobile phone connection services we study the quality of decision making in a laboratory environment where consumers only face a small set of mobile phone plan options but have to contend with different degrees of tariff complexity as well as uncertain usage our main finding is that simply eliminating the multipart tariff structure does not necessarily lead to better decisions rather it is multipart tariffs with included values in excess of monthly fees thus entailing two tier pricing structures with increasing marginal costs which lead to the worst decisions knowledgeable participants who understand mobile phone plan pricing make significantly better choices

cross selling switching costs and imperfect competition in british banks this paper attempts to evaluate the competitiveness of british banking in the presence of cross selling and switching costs during 1993 2008 it presents estimates of a model of banking behaviour that encompasses switching costs as well as cross selling of loans and off balance sheet transactions the evidence from panel estimation of the model indicates that the consumer faced high switching costs in the loan market in the latter part of the sample period as a result of weaker competitiveness in the loan market additionally the weaker competitiveness in the loan market appears to facilitate the cross selling behaviour of british banks which helps explain the rapid growth of non interest income during the last two decades

contracting with diversely naive agents in standard contract theoretic models the underlying assumption is that agent types differ in their preference or cost parameters and the principal s objective is to design contracts in order to screen this type we study a contract theoretic model in which the heterogeneity among agent types is of a cognitive nature in our model the agent has dynamically inconsistent preferences agent types differ only in their degree of sophistication that is their ability to forecast the change in their future tastes we fully characterize the menu of contracts which the principal offers in order to screen the agent s sophistication the menu does not exclude any type it provides a perfect commitment device for relatively sophisticated types and exploitative contracts which involve speculation with relatively naive types more naive types are more heavily exploited and generate a greater profit for the principal our results allow us to interpret real life contractual arrangements in a variety of industries

what do consumers really pay on their checking and credit card accounts explicit implicit and avoidable costs consumers in the united states make billions of transactions each year using cash checks debit cards and credit cards bank and credit card accounts provide consumers with liquidity to clear and settle these transactions in return consumers pay a variety of fees and both explicit and implicit interest charges the importance of retail banking and credit markets to economic activity drives interest in many open policy and research questions do households borrow too much relative to a neoclassical benchmark christopher d carroll 2001 why do many households leave a substantial amount of money on the table in managing their accounts sumit agarwal et al 2006 david gross and nicholas souleles 2002 do firms structure pricing to exploit consumer cognitive biases or limitations stefano dellavigna and ulrike malmendier 2004 xavier gabaix and david laibson 2006 how do learning sumit agarwal john driscoll and gabaix 2008 and disclosure regulation stango and zinman 2009b interact with consumer decision making and firm strategy to determine market outcomes this paper examines some threshold questions that should inform the questions above what do people really pay to use their bank and credit card accounts and which cost components are the largest of all the costs that people pay which could they easily avoid by making different day to day choices and how stable are both the level of costs and the share of costs that are avoidable for a given person over time what do consumers really pay on their checking and credit card accounts explicit implicit and avoidable costs