consumer exploitation and notice periods firms often set long notice periods when consumers cancel a contract and sometimes do so even when the costs of changing or canceling the contract are small we investigate a model in which a firm offers a contract to consumers who may procrastinate canceling it due to naive present bias we show that the firm may set a long notice period to exploit naive consumers

winners losers and the nuclear waste dilemma this paper explores how property right assignment affects social efficiency when a public program has both public good and public bad components we show that when willingness to accept a public bad exceeds the willingness to pay the net benefit is unambiguously lower when the property right supports the status quo institutional structure thus kaldor hicks efficiency tests tend to favor public programs and mitigation over the status quo even when mitigation negatively affects another group to illustrate the result we develop social cost estimates for moving nuclear waste from current temporary storage facilities to a permanent central repository at yucca mountain nv usa for a representative city with a population of 226 195 the present value of the external cost of shipping waste is 1 42 billion when those living near temporary nuclear waste storage facilities are assigned the property right to health and safety that number swells to 5 95 billion when those living near the transport route are assigned the property right thus property right assignment affects the efficient level of nuclear waste and thus nuclear energy produced

an experiment on time preference and misprediction in unpleasant tasks we experimentally investigate the time inconsistent taste for immediate gratification and future preference misprediction across 7 weeks 100 participants choose the number of unpleasant transcription tasks given various wages to complete immediately and at different future dates participants preferred 10 12 fewer tasks in the present compared to any future date leading to an estimated of 0 83 comparing predictions with actual immediate work choices provides evidence against substantial sophistication with estimates implying that participants understand no more than 24 of their present bias finally we find evidence of projection bias participants wished to complete 4 12 fewer tasks when decisions were elicited right after completing tasks rather than before

the ellsberg paradox and risk aversion an anticipated utility approach the paper describes a decision process under which it is rational to prefer a lottery with known probabilities to a similar ambiguous lottery where the decision maker does not know the exact values of the probabilities the ellsberg paradox this is done by modeling ambiguous lotteries as two stage lotteries by assuming the independence axiom without the reduction of compound lotteries axiom and by using the anticipated utility functional this paper also gives conditions under which less ambiguity is preferred and presents some comparative statics analysis as well as some inter personal comparisons finally it proves that within the anticipated utility framework risk and ambiguity are almost identical copyright 1987 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

the hyperbolic consumption model calibration simulation and empirical evaluation ur preferences for the long run tend to conflict with our short run behavior when planning for the long run we intend to meet our deadlines exercise regularly and eat healthfully but in the short run we have little interest in revising manuscripts jogging on the stairmaster and skipping the chocolate souffleala mode delay of gratification is a nice long term goal but instant gratification is disconcertingly tempting this gap between long run intentions and short run actions is apparent across a wide range of behaviors including saving choices a 1997 survey found that 76 percent of respondents believe they should be saving more for retirement looking only at respondents who believed they were at an age where you should be seriously saving already the survey found that 55 percent reported being behind in their savings and only 6 percent reported being ahead farkas and johnson 1997 the report on the survey concluded t he gaps between people s atti tudes intentions and behavior are troubling and threaten increased insecurity and dissatisfaction for people when they retire americans are simply not doing what logic and their own reasoning suggests they should be doing a 1993 luntz webber merrill lynch survey found similar answers when baby boomers were asked what percentage of your annual household income do you think you should save for retirement and what percentage of your annual

individual option prices for climate change mitigation abstract willingness to pay for climate change mitigation depends on people s perceptions about just how bad things will get if nothing is done individual subjective distributions for future climate conditions are combined with stated choices over alternative climate policies to estimate individual option prices the appropriate ex ante welfare measure in the face of uncertainty for climate change mitigation we find statistically significant sensitivity of estimated option prices to both expected future conditions and uncertainty about future conditions

optimal incentive contracts under inequity aversion we analyze the classic moral hazard problem with the additional assumption that agents are inequity averse the presence of inequity aversion alters the structure of optimal contracts when the concern for equity becomes more important there is convergence towards linear sharing rules the sufficient statistics result is violated depending on the environment contracts may be either overdetermined i e include non informative performance measures or incomplete i e neglect informative performance measures finally our model delivers a simple rationale for team based incentives implying wage compression 2010 elsevier inc

commitment flexibility and optimal screening of time inconsistency this paper develops a theory of optimal provision of commitment devices to people who value both commitment and flexibility and whose preferences differ in the degree of time inconsistency if time inconsistency is observable both a planner and a monopolist provide devices that help each person commit to the efficient level of flexibility however the combination of unobservable time inconsistency and preference for flexibility causes an adverse selection problem to solve this problem the monopolist and possibly the planner curtail flexibility in the device for a more inconsistent person at both ends of the efficient choice range moreover they may have to add unused options to the device for a less inconsistent person and also distort his actual choices this theory has normative and positive implications for private and public provision of commitment devices

fairness and inflation persistence we argue that peoples concern for fairness may explain an unsolved puzzle in macroeconomics the persistence of ine ation we extend a 1990 wage contracting model of bhaskar in which workers disutility from being paid less than other workers exceeds their utility from being paid more this model generates a continuum of equilibria over a range of wages and unemployment rates if workers expectations are based on the past behavior of wage growth these beliefs will be self fule lling generating ine ation persistence within but not outside of this range based on quarterly u s data over the period 1955 2000 we e nd evidence that ine ation is more persistent between unemployment rates of 4 7 and 6 5 than outside these bounds jel e31 e3 e5

investment under uncertainty and time inconsistent preferences abstract while standard real options models assume that agents possess a constant rate of time preference there is substantial evidence that agents are impatient about choices in the short term but are patient when choosing between long term alternatives we extend the real options framework to model the investment timing decisions of entrepreneurs with time inconsistent preferences the impact on investment timing depends on such factors as whether entrepreneurs are sophisticated or naive in their expectations regarding their future time inconsistent behavior and whether the payoff from investment occurs all at once or over time the model is extended to the case of a competitive equilibrium

time tradeoff sequences for analyzing discounting and time inconsistency this paper introduces time tradeoff tto sequences as a general tool to analyze intertemporal choice we give several applications for empirical purposes we can measure discount functions without requiring any measurement of or assumption about utility we can quantitatively measure time inconsistencies and simplify their qualitative tests tto sequences can be administered and analyzed very easily using only pencil and paper for theoretical purposes we use tto sequences to axiomatize quasi hyperbolic discount functions we demonstrate the feasibility of measuring tto sequences in an experiment in which we tested the axiomatizations our findings suggest rejections of several currently popular discount functions and call for the development of new ones it is especially desirable that such discount functions can accommodate increasing impatience

risk self protection and ex ante economic value abstract we develop three propositions about the ex ante value of reduced risk if there is a continuous outcome distribution and if self protection influences outcome probability and severity then 1 unobservable utility terms cannot be eliminated from the ex ante value expressions 2 knowledge of the convexity or the nonconvexity of dose response functions is insufficient to sign changes in these expressions and 3 self protection expenditures need not be a lower bound measure of these expressions therefore many restrictions applied in recent empirical work on the economic value of risk changes are not immediately transferable to settings where endogenous risks prevail

anomalies in intertemporal choice evidence and an interpretation research on decision making under uncertainly has been strongly influenced by the documentation of numerous expected utility eu anomalies behaviors that violate the expected utility axioms the relative lack of progress on the closely related topic of intertemporal choice is partly due to the absence of an analogous set of discounted utility du anomalies we enumerate a set of du anomalies analogous to the eu anomalies and propose a model that accounts for the anomalies as well as other intertemporal choice phenomena incompatible with du we discuss implications for savings behavior estimation of discount rates and choice framing effects

hyperbolic discounting and the phillips curve using a standard dynamic general equilibrium model we show that the interaction of staggered nominal contracts with hyperbolic discounting leads to inflation having significant long run effects on real variables

modelling time inconsistent preferences abstract the paper reviews some recent theoretical contributions on the modelization of time inconsistent preferences as well as implications for individual behavior the focus is on the interpretation of the concepts and the link with concepts in psychology

rational irrationality some economics of self management abstract the paper first reviews some of the main challenges posed to our received economic paradigm by a variety of behaviors documented by psychologists and discusses possible responses to this challenge it then describes a specific attempt at unifying a number of themes in social psychology using a parsimonious modeling of human behavior

risky sports and the value of safety information abstract we develop a theoretical account of how athletes engaged in risky sports value safety information based on our model we postulate that the demand value of such information rises with wealth and exposure and declines with the athlete s appetite for risk we use survey data from a sample of backcountry skiers to empirically test these predictions the high degree of self control over exposure makes these athletes a well suited population to study the demand value of safety information caution is warranted in the empirical analysis as unobserved factors may jointly affect the athlete s perceived risk and his willingness to pay for obtaining safety information we use a recursive two stage estimation approach to account for endogeneity concerns the empirical results are supportive of our theoretical predictions and suggest that variations in athletes demand for safety information can be explained by personal beliefs about risk exposure and deliberate risk taking

reconsidering the moral hazard risk avoidance tradeoff the received model for optimal demand side cost sharing trades off moral hazard and risk avoidance this model appears to lie behind recent increases in initial cost sharing such as those embodied in health savings accounts and health reimbursement accounts at the same time there is evidence that lower cost sharing for certain drugs can reduce future total health care costs and or improve future health and this may be true of other medical services as well to the degree that individuals remain in the same common insurance pool lower cost sharing that induces increases in certain services that reduce total costs including future costs represents a classic case for a subsidy and will minimize an employer s labor costs even if total costs increase the value of a change in health could increase more in that case such a subsidy is consistent with recent work in behavioral economics for those with self control problems

repeated moral hazard with a time inconsistent agent abstract i consider a repeated principal agent model with moral hazard in which the agent has preferences which are widely used to capture time inconsistency i analyze the case where the agent is sophisticated in the sense that he is fully aware of his inconsistent discounting i characterize the optimal wage scheme for such an agent and compare it to time consistent benchmarks the marginal cost of rewarding the agent for high output today exceeds the marginal benefit of delaying these rewards until tomorrow in this sense the principal does not smooth the agent s rewards over time when facing a sophisticated agent it is optimal for the principal to reward the good performance more and punish the bad performance more in the early period relative to the optimal wage scheme for a time consistent agent

the value of a statistical life under ambiguity aversion abstract the paper shows that ambiguity aversion increases the value of a statistical life if the marginal utility of an increase in wealth is larger if one is alive rather than dead intuitively ambiguity aversion has a similar effect as an increase in the perceived baseline mortality risk and thus operates as the dead anyway effect a numerical example suggests however that ambiguity aversion cannot justify the substantial ambiguity premium apparently embodied in environmental policy making the paper also shows that ambiguity aversion decreases the marginal cost of individual self protection effort but may well decrease its marginal benefit so that the total effect of ambiguity aversion on self protection is unclear

incentive compatible guaranteed renewable health insurance premiums theoretical models of guaranteed renewable insurance display front loaded premium schedules such schedules both cover lifetime total claims of low risk and high risk individuals and provide an incentive for those who remain low risk to continue to purchase the policy questions have been raised of whether actual individual insurance markets in the us approximate the behavior predicted by these models both because young consumers may not be able to afford front loading and because insurers may behave strategically in ways that erode the value of protection against risk reclassification in this paper the optimal competitive age based premium schedule for a benchmark guaranteed renewable health insurance policy is estimated using medical expenditure data several factors are shown to reduce the amount of front loading necessary indeed the resulting optimal premium path increases with age actual premium paths exhibited by purchasers of individual insurance are close to the optimal renewable schedule we estimate finally consumer utility associated with the feature is examined

hyperbolic discounting and secondary markets does the existence of secondary markets for durable goods affect price and allocation on primary markets we study competitive equilibria for durable goods where the possibility of future trade on secondary markets does not affect consumer behaviour in the primary market provided consumers are exponential discounters if consumers are hyperbolic discounters however secondary markets are no longer neutral as they allow consumers to postpone their purchasing decisions in this case the equilibrium price in the primary market is decreasing in the number of periods in which the good can be traded hence primary producers have an incentive to close down secondary markets if secondary markets never close hyperbolic discounters may use collusive intrapersonal strategies which lead to a pareto improvement for all incarnations of the same consumer we characterise the set of all stationary equilibrium prices and show that the competitive equilibrium allocation may be inefficient

self coordination in time inconsistent stochastic decision problems a planner doer game framework abstract time inconsistency has been a thorny issue in many economic and financial decision making problems especially when risk measures are involved in performance criteria we develop in this paper a two tier planner doer game framework with self coordination by aligning the global interest of the planner and the local interests of the doers by applying suitable penalty functions a degree of internal harmony measured quantitatively by the expected cost of self coordination can be achieved by the self coordination policy we establish an axiom system for modified preferences under which the self coordination policy can be obtained by solving a corresponding optimization problem we then apply our game framework successfully in dynamic mean variance portfolio selection

mortality effects of regulatory costs and policy evaluation criteria this article concerns the cost benefit of policies designed to reduce risks of mortality in specific instances the author points out that risk regulations directly reduce risk but they may produce offsetting risk increases regulated risks generate a substitution effect as individuals risk averting actions will diminish recognition of these effects alters benefit cost criteria and the value of life estimates pertinent to policy analysis particularly expensive risk regulations may be counterproductive the expenditure level that will lead to the loss of one statistical life equals the value of life divided by the marginal propensity to spend on health regulations with a cost of 30 million to 70 million per life saved will on balance have a net adverse effect on mortality because of these linkages excerpt

modeling the psychology of consumer and firm behavior with behavioral economics abstract marketing is an applied science that tries to explain and influence how firms and consumers behave in markets marketing models are usually applications of standard economic theories which rely on strong assumptions of rationality of consumers and firms behavioral economics explores the implications of the limits of rationality with the goal of making economic theories more plausible by explaining and predicting behavior more accurately while maintaining formal power this article reviews six behavioral economics models that are useful to marketing three models generalize standard preference structures to allow for sensitivity to reference points and loss aversion social preferences toward outcomes of others and preference for instant gratification the other three models generalize the concept of game theoretic equilibrium allowing decision makers to make mistakes encounter limits on the depth of strategic thinking and equilibrate by learning from feedback the authors also discuss a sp

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

evaluating change in objective ambiguous mortality probability valuing reduction in ambiguity size and risk level this article develops a valuation model to evaluate mortality probability changes under objective ambiguity where multiple mortality probabilities are exogenously given we construct the valuation model based on upalpha maxmin expected utility to evaluate the reduction in ambiguity size and risk level as well as estimate the subjects ambiguity attitude our model can bring an interesting policy implication if the subjects are ambiguity averse a reduction in ambiguity size with a constant risk level can increases welfare thus even if risk level cannot be lowered reduction in ambiguity size can also be used as a measure toward increasing welfare our model can empirically estimate this welfare change resulting from the reduction in ambiguity size to demonstrate how our model works we apply it to survey data on a public program that reduces mortality probability in accidents caused by wildlife

uncertainty and measurement error in welfare models for risk changes abstract most welfare models of environmental or mortality risk reductions assume that risks are exogenously determined and known with certainty however a growing body of research suggests that uncertainty about risks can affect choices over risky prospects i present a decision weighted random utility model that decomposes welfare losses into those attributable to an increase in the deterministic component of risk and those attributable to uncertainty about risk i apply the model to an illustrative dataset of subjects perceived mortality risk and willingness to accept the risk of nuclear waste transport i estimate the model using lewbel s 2000 strictly exogenous regressor approach to account for endogeneity bias and measurement error subjects display aversion to both risk and uncertainty about the risk of a transport accident so that increases in either leads to social welfare losses roughly 12 of the external cost of nuclear waste transport is attributable to the public s uncertainty about transport risk

incorporating outcome uncertainty and prior outcome beliefs in stated preferences stated preference studies tell respondents that policies create environmental changes with varying levels of uncertainty however respondents may include their own a priori assessments of uncertainty when making choices among policy options using a choice experiment eliciting respondents preferences for conservation policies under climate change we find that higher outcome uncertainty reduces utility when accounting for endogeneity we find that prior beliefs play a significant role in this cost of uncertainty thus merely stating objective levels of outcome uncertainty will not necessarily solve the problem of people valuing something differently from originally intended respondents prior beliefs must be accounted for

decreasing impatience a criterion for non stationary time preference and hyperbolic discounting despite recent interest in hyperbolic discounting there has been little discussion of exactly what property of time preferences is instantiated by hyperbolic or quasi hyperbolic functional forms the paper revives an earlier proposal in prelec 1989 that the key property is prattarrow convexity of the log of the discount function which corresponds to decreasing impatience di at the level of preferences di provides a natural criterion for assessing the severity of departure from stationarity in that greater di is equivalent to more choices of dominated options in two stage decision problems as well as greater convexity of the log of the discount function inefficient choices may arise as intentional precommitments or as unintended reversals of preference by naive agents

intertemporal coordination with delay options abstract this paper studies equilibrium selection in intertemporal coordination problems with delay options the risk dominant action of the underlying one shot game is selected when frictions are arbitrarily small larger frictions introduce real option effects in the model and inhibit coordination

efficiency and equilibrium when preferences are time inconsistent abstract we consider an exchange economy with time inconsistent consumers whose preferences are additively separable if consumers have identical discount factors then allocations that are pareto efficient at the initial date are also renegotiation proof in an economy with a sequence of markets competitive equilibria are pareto efficient in this sense and for generic endowments only if preferences are locally homothetic

incentives for procrastinators we examine how principals should design incentives to induce time inconsistent procrastinating agents to complete tasks efficiently delay is costly to the principal but the agent faces stochastic costs of completing the task and efficiency requires waiting when costs are high if the principal knows the task cost distribution she can always achieve first best efficiency if the agent has private information the principal can induce first best efficiency for time consistent agents but often cannot for procrastinators we show that second best optimal incentives for procrastinators typically involve an increasing punishment for delay as time passes

unforeseen contingency and renegotiation with asymmetric information this article considers a buyer seller contracting model in which the seller possesses private information about all relevant aspects of the state of nature including how much each action is worth to the buyer i argue that given asymmetric information the buyer may not entirely dismiss an unforeseen contingency claim by the seller then if the buyer lacks the foresight awareness to expect the unexpected the model admits an equilibrium in which a seemingly complete contract is written and then renegotiated along its outcome path to generate inefficiency ex post

evaluating the effect of alternative risk communication devices on willingness to pay results from a dichotomous choice contingent valuation experiment two versions of a contingent valuation questionnaire that differ only in the device used to communicate risks from hazardous waste were sent to california households both risk communication devices provide wtp functions which vary in a statistically significant fashion with the absolute risk reduction however these empirical results also demonstrate that different risk communication devices produce statistically different logit equations and hence estimates of willingness to pay wtp for reductions in exposure to hazardous waste the pros and cons of using each risk communication device in cvm surveys is also discussed

self control and bargaining abstract this paper examines a bargaining game with alternating proposals where sophisticated quasi hyperbolic discounters negotiate over an infinite stream of payoffs in markov perfect equilibrium payoffs are almost always unique and a small advantage in self control can result in a large advantage in payoff in subgame perfect equilibrium a multiplicity of payoffs and delay can arise despite the complete information setting markov perfect equilibria are the best subgame perfect equilibria for the agent with more self control and the worst for the agent with less self control naivete can help a player by increasing their reservation value

coevolution of policy market and technical price risks in the eu ets within the eu there have been calls for governments to provide greater certainty over carbon prices even though it is evident that their price risk is not entirely due to policy uncertainty we develop a stochastic simulation model of price formation in the eu ets to analyse the coevolution of policy market and technology risks under different initiatives the current situation of a weak 20 overall abatement target motivates various technology support interventions elevating policy uncertainty as the major source of carbon price risk in contrast taking a firm decision to move to a more stringent 30 cap would leave the eu ets price formation driven much more by market forces than by policy risks this leads to considerations of how much risk mitigation by governments would be appropriate and how much should be taken as business risk by the market participants