behavioral contract theory abstract this review provides a critical survey of psychology and economics behavioral economics research in contract theory first i introduce the theories of individual decision making most

competition under consumer loss aversion we address the effect of expectation based consumer loss aversion on firm strategy in imperfect competition consumers are fully informed about match value and price at the moment of purchase however some consumers are initially uninformed about their tastes and form a reference point consisting of an expected match value and price distribution whereas others are perfectly informed all the time we show that if firms have symmetric costs a larger share of informed consumers leads to a more competitive outcome the reverse holds if cost asymmetry in duopoly is sufficiently large

competition and the number of firms in a market are duopolies more competitive than atomistic markets this paper uses a variant of the standard search model to examine market equilibrium and the consequences for market equilibrium of an increase in the number of firms if marginal search costs increase with the number of searches then the demand curve facing any firm will be kinked with the elasticity of demand with respect to price decreases being less than with respect to price increases prices may not change in response to changes in marginal costs as the number of firms increases the maximum price that is consistent with equilibrium increases to the monopoly price but the minimum price decreases on the other hand if marginal search costs decrease with the number of searches equilibrium if it exists is characterized by a

self rewards and personal motivation self administered rewards are ubiquitous they serve as incentives for personal accomplishments and are widely recommended to increase personal motivation we show that in a model with time inconsistent and reference dependent preferences self rewards can be a credible and effective tool to overcome self control problems we also discuss the different types of self rewards the individual can use such as vice goods and virtue goods and analyze which types of goods the individual prefers

the real effects of liquidity during the financial crisis evidence from automobiles illiquidity in short term credit markets during the financial crisis might have severely curtailed the supply of nonbank consumer credit using a new data set linking every car sold in the united states to the credit supplier involved in each transaction we find that the collapse of the asset backed commercial paper market reduced the financing capacity of such nonbank lenders as captive leasing companies in the automobile industry as a result car sales in counties that traditionally depended on nonbank lenders declined sharply although other lenders increased their supply of credit the net aggregate effect of illiquidity on car sales is large and negative we conclude that the decline in auto sales during the financial crisis was caused in part by a credit supply shock driven by the illiquidity of the most important providers of consumer finance in the auto loan market these results also imply that interventions aimed at arresting illiquidity in short term credit markets might have helped contain the real effects of the crisis

premium levels and demand response in health insurance relative thinking and zero price effects abstract in health care systems with a competitive health insurance market governments or other sponsors e g employers often subsidize premiums to encourage enrolment these subsidies are typically independent of plan choice leaving the absolute premium differences in place so as not to distort consumer choice of plan such subsidies do however change the relative premium differences across plans which according to theories from behavioral economics can affect choice consumers might be sensitive to differences relative to a reference premium relative thinking furthermore consumers might be particularly sensitive to a reference premium of zero zero price effect a relevant range for some subsidized health insurance markets this paper tests these ideas with two sources of evidence we argue that observed equilibria in germany and the u s medicare advantage markets are consistent with a powerful zero price effect resulting in an equilibrium focal pricing at zero this contrasts with the netherlands where equilibrium premiums are well above zero in an empirical test using hypothetical questions in a web based survey in these three countries we also find evidence for both a relative thinking and a zero price effect in the demand for health insurance our findings imply that well designed subsidies can leverage relative thinking to increase demand elasticity for health plans creation of a powerful reference price e g at zero however risks subverting price competition

the role of price in multi attribute product evaluations the potentially multifaceted role of price in product evaluations is investigated with an empirical analysis of surveyed beliefs attitudes and intentions regarding automobile brands it is found that price beliefs both influence and are influenced by beliefs about a brand s quality thereby contributing to the attribution definition process however price is not a significant determinant of overall attitude it is also found that price becomes a negative factor when behavioral intentions are involved lending support to an economic interpretation of price

sequential negotiations with loss averse buyers abstract this paper analyzes sequential negotiations with exogenous breakdown risk between a risk neutral seller and a loss averse buyer who is privately informed about his valuation i show that compared to the risk neutral benchmark loss aversion on the buyer s side softens the rent efficiency trade off for the seller the reason is that the higher the buyer s valuation is the more he has to lose by rejecting the seller s offer thus in equilibrium the seller s profits and overall efficiency are both higher than in the risk neutral case moreover i also show that loss aversion has a redistributive effect by increasing the equilibrium payoff of some low valuation buyers and decreasing that of high valuation ones

task assignment under agent loss aversion we analyze a task assignment model in which a principal assigns a task to one of two agents depending on future states if the agents have concave utility the principal assigns the task to them contingent on the state we show that if the agents are loss averse a state independent assignment assigning the task to a single agent in all states can be optimal even when the principal can write a contingent contract at no cost

anomalies risk aversion economists ubiquitously employ a simple and elegant explanation for risk aversion it derives from the concavity of the utility of wealth function within the expected utility framework we show that this explanation is not plausible in most applications since anything more than economically negligible risk aversion over moderate stakes requires a utility of wealth function that is so concave that it predicts absurdly severe risk aversion over very large stakes we present examples of how the expected utility framework has misled economists and why we believe a better explanation for risk aversion must incorporate loss aversion and mental accounting

beyond bankruptcy does the us bankruptcy code provide a fresh start to entrepreneurs abstract this paper assesses the extent to which the us bankruptcy system is effective in providing small businesses a fresh start after a bankruptcy filing i use data from the 1993 1998 and 2003 national survey of small business finances to explore how firms fare after a bankruptcy filing on the positive side previously bankrupt firms are not any more burdened than the average small firm by problems relating to profitability cash flow health insurance costs or taxes further the fact that these firms are surviving several years after the filing is itself a testament to the efficient functioning of the us bankruptcy system it suggests that the bankruptcy system goes a long way toward helping businesses recover after a bankruptcy filing however the one area of concern that persists after a filing is financing or credit access in general these firms have a nearly 24 percentage point higher likelihood of being denied a loan and are charged interest rates that are more than 1 percentage point higher than those charged to other businesses a bankruptcy affects all types of financing even trade credit which is a significant form of lending between businesses in fact it appears that firms with a bankruptcy record are rationed out of the market with all types of loans being denied at significantly higher rates than other firms further my results show that bankruptcy leads to a class of discouraged borrowers who are significantly less likely to even apply for a loan

competition and price variation when consumers are loss averse we modify the salop 1979 model of price competition with differentiated products by assuming that consumers are loss averse relative to a reference point given by their recent expectations about the purchase consumers sensitivity to losses in money increases the price responsiveness of demand and hence the intensity of competition at higher relative to lower market prices reducing or eliminating price variation both within and between products when firms face common stochastic costs in any symmetric equilibrium the markup is strictly decreasing in cost even when firms face different cost distributions we identify conditions under which a focal price equilibrium where firms always charge the same focal price exists and conditions under which any equilibrium is focal

on the consensus effect abstract individuals often tend to conform to the choices of others in group decisions compared to choices made in isolation we show that this behavior which we term the consensus effect is equivalent to a well known violation of expected utility namely strict quasi convexity of preferences which is shared by many popular non expected utility models in contrast to the equilibrium outcome when individuals are expected utility maximizers quasi convexity of preferences imply that group decisions may fail to properly aggregate preferences and strictly pareto dominated equilibria may arise

incomplete contracting renegotiation and expectation based loss aversion abstract we consider a simple trading relationship between an expectation based loss averse buyer and a profit maximizing seller when writing a long term contract the parties have to rely on renegotiation in order to ensure materially efficient trade ex post we show that if the buyer expects renegotiation to occur the seller can opportunistically exploit the buyer s attachment to the expected outcome of renegotiation in other words incomplete contracts create a new type of hold up problem if credible the buyer prefers to expect not to renegotiate which gives rise to ex post inefficiencies in a next step we allow the buyer to undertake a non contractible investment we find that loss aversion can mitigate the traditional hold up problem

race ethnicity and credit card marketing there is a vast literature on discrepancies in consumer credit related to race and ethnicity i explore a pattern that was first identified in aggregate data by han keys and li 2011 in their study of credit access blacks were approximately 27 less likely to receive offers from credit card lenders during the sample period even after controlling for variables such as credit history household income and local economic conditions hispanics were 17 less likely to receive an offer after including controls the discrepancy is robust to lender specific regressions and the inclusion of a large number of explanatory variables my findings imply that marketing is an important area for analysis of discrimination in consumer credit due to the likely need for confidential information in further analysis investigation by an appropriate regulatory agency such as the consumer financial protection bureau would be useful

a behavioral analysis of stochastic reference dependence we examine the reference dependent risk preferences of k oszegi and rabin 2007 focusing on their choice acclimating personal equilibria concept we relate their model to other existing generalizations of expected utility we demonstrate that linear gain loss choice acclimating personal equilibria is equivalent to the intersection of quadratic utility and pessimistic rank dependent utility however it has only a trivial intersection i e expected utility with other referencedependent preferences we use these relationships to extend our understanding of k oszegi and rabin s model linking their functional form to behavior demonstrating new applications and deriving new tests and looking for support in existing experimental data 98 words

are markets with loss averse consumers more sensitive to losses behavioral pricing and revenue management aim to incorporate realistic consumer behavior into firms pricing and inventory models the key input to these models is market demand which is often assumed to inherit the characteristics of consumer behavior as when for example one assumes that a market consisting of loss averse consumers is more responsive to losses than to gains yet market demand and consumer behavior need not be related and so we argue that approach to modeling market demand is misguided this paper proposes an approach that accounts for the heterogeneity in consumer valuation we aggregate the demand of individual loss averse consumers to obtain market demand and show that market demand may be more responsive to gains or losses or it may be equally responsive our results have profound implications not only for how best to characterize the market demand of behaviorally biased consumers but also for determining the firm s optimal pricing policy this paper was accepted by serguei net

price dispersion in the small and in the large evidence from an internet price comparison site this paper examines four million daily price observations for more than 1 000 consumer electronics products on the price comparison site http shopper com we find little support for the notion that prices on the internet are converging to the law of one price in addition observed levels of price dispersion vary systematically with the number of firms listing prices the difference between the two lowest prices the gap averages 23 per cent when two firms list prices and falls to 3 5 per cent in markets where 17 firms list prices these empirical results are an implication of a general clearinghouse model of equilibrium price dispersion

more or less a model and empirical evidence on preferences for under and overpayment in trade in transactions abstract trade in transactions typically involve an exchange of an old used version for a new or newer version of the product when consumers trade in their used model for a new model the firm faces the choice of paying the consumer a relatively low price for the used model and charging a commensurately low price for the new model or paying a relatively high price for the used model and charging a commensurately high price for the new model the extant literature suggests that consumers always prefer to be overpaid in trade in transactions because they disproportionately value the gain associated with the revenues from the sale of the used version of the product the authors draw from the prospect theory value function to develop a simple analytical model that identifies a condition under which this preference for overpayment is reversed their model predicts that even when faced with economically equivalent price formats consumers prefer to be overpaid when the ratio of the price of their used product

competitive persuasive advertising under consumer loss aversion abstract i present a model to describe the effects of persuasive advertising targeted at consumers with expectation based reference dependent preferences persuasive advertising is competitive and increases the salience of advertised products while decreasing the salience of competing products consumers gain loss utility associated with the expectation to buy the most salient product is inflated while gain loss utility associated with the expectation to buy the least salient product is deflated i show that under moderate levels of loss aversion and product differentiation persuasive advertising has strictly anti competitive effects whenever consumers are aware of prices but uncertain about their individual match value from a purchase

collusion and price rigidity we consider an in nitely repeated bertrand game in which prices are publicly observed and each rm receives a privately observed i i d cost shock in each period we focus on symmetric perfect public equilibria sppe wherein any punishments are borne equally by all rms we identify a tradeoff that is associated with collusive pricing schemes in which the price to be charged by each rm is strictly increasing in its cost level such fully sorting schemes offer efficiency bene ts as they ensure that the lowest cost rm makes the current sale but they also imply an informational cost distorted pricing and or equilibrium path price wars since a higher cost rm must be deterred from mimicking a lower cost rm by charging a lower price a rigid pricing scheme where a rm s collusive price is independent of its current cost position sacri ces efficiency bene ts but also diminishes the informational cost for a wide range of settings the optimal symmetric collusive scheme requires i the absence of equilibrium path price wars and ii a rigid price if rms are sufficiently impatient however the rigid pricing scheme cannot be enforced and the collusive price of lower cost rms may be distorted downward in order to diminish the incentive to cheat when the model is modi ed to include i i d public demand shocks the downward pricing distortion that accompanies a rm s lower cost realization may occur only when current demand is high

modeling loss aversion and reference dependence effects on brand choice based upon a recently developed multiattribute generalization of prospect theory s value function tversky and kahneman 1991 we argue that consumer choice is influenced by the position of brands relative to multiattribute reference points and that consumers weigh losses from a reference point more than equivalent sized gains loss aversion we sketch implications of this model for understanding brand choice we develop a multinomial logit formulation of a reference dependent choice model calibrating it using scanner data in addition to providing better fit in both estimation and forecast periods than a standard multinomial logit model the model s coefficients demonstrate significant loss aversion as hypothesized we also discuss the implications of a reference dependent view of consumer choice for modeling brand choice demonstrate that loss aversion can account for asymmetric responses to changes in product characteristics and examine other implications for competitive strategy

an endowment effect for risk experimental tests of stochastic reference points recent models of reference dependent preferences indicate that expectations may play a prominent role in the presence of behavioral anomalies a subset of such expectations based models predicts an endowment effect for risk that risk attitudes differ when reference points change from certain to stochastic in two purposefully simple risk preference experiments eliminating often discussed confounds i demonstrate both between and within subjects such an endowment effect for risk these results provide needed separation between expectations based reference dependent models allow for evaluation of recent theoretical extensions and may help to close a long standing debate in decision science on inconsistency between utility elicitation methodologies

preferred personal equilibrium and simple choices abstract this paper studies choices under the preferred personal equilibrium concept introduced by koszegi and rabin 2006 for modeling choice given expectations based reference dependent preferences the main result of this paper shows that when expectations are not observed and parametric assumptions on utility are not made preferred personal equilibrium choice is a special case of the rational shortlist method of manzini and mariotti 2007 building on this connection the paper provides an axiomatization of preferred personal equilibrium choice behavior and discusses the implications of these results for how choices can be used to test and identify the model and for the relationship between preferred personal equilibrium and other models of behavior

expectations based reference dependent life cycle consumption this study incorporates a recent preference specification of expectations based loss aversion which has been applied broadly in microeconomics into a classic macro model to offer a unified explanation for three empirical observations about life cycle consumption first loss aversion explains excess smoothness and sensitivity that is the empirical observation that consumption responds to income shocks with a lag intuitively such lagged responses allow the agent to delay painful losses in consumption until his expectations have adjusted secondly the preferences generate a hump shaped consumption profile early in life consumption is low due to a first order precautionary savings motive however as uncertainty resolves over time this motive is dominated by time inconsistent overconsumption that eventually leads to declining consumption towards the end of life thirdly consumption drops at retirement prior to retirement the agent wants to overconsume his uncertain income before his expectations catch up post retirement however income is no longer uncertain and overconsumption is associated with a sure loss in future consumption as an empirical contribution i structurally estimate the preference parameters using life cycle consumption data my estimates match those obtained in experiments and other micro studies and generate the degree of excess smoothness observed in macro consumption data

cartel pricing dynamics with reference dependent preferences this paper characterizes cartel pricing dynamics when consumers have reference dependent preferences firms have a common discount factor unknown to consumers and a common cost i i d over time consumers observe prices over time and update their expectations about firms ability to collude which affects consumers price expectations reference dependent preferences make consumers lose utility when the actual price is higher than the expected one which forces colluding firms to raise prices alongside consumers price expectations this increasing price path is capped by the price arising when consumers are sure that firms collude

salience and consumer choice we present a theory of context dependent choice in which a consumer s attention is drawn to salient attributes of goods such as quality or price an attribute is salient for a good when it stands out among the good s attributes relative to that attribute s average level in the choice set or more broadly the choice context consumers attach disproportionately high weight to salient attributes and their choices are tilted toward goods with higher quality price ratios the model accounts for a variety of disparate evidence including decoy effects and context dependent willingness to pay it also suggests a novel theory of misleading sales

expectations as endowments evidence on reference dependent preferences from exchange and valuation experiments while evidence suggests that people evaluate outcomes with respect to reference points little is known about what determines them we conduct two experiments that show that reference points are determined at least in part by expectations in an exchange experiment we endow subjects with an item and randomize the probability they will be allowed to trade subjects that are less likely to be able to trade are more likely to choose to keep their item in a valuation experiment we randomly assign subjects a high or low probability of obtaining an item and elicit their willingness to accept for it the high probability treatment increases valuation of the item by 20 30 copyright 2011 oxford university press

reference dependent risk attitudes we use koszegi and rabin s 2006 model of reference dependent utility and an extension of it that applies to decisions with delayed consequences to study preferences over monetary risk because our theory equates the reference point with recent probabilistic beliefs about outcomes it predicts specific ways in which the environment influences attitudes toward modest scale risk it replicates classical prospect theory including the prediction of distaste for insuring losses when exposure to risk is a surprise but implies first order risk aversion when a risk and the possibility of insuring it are anticipated a prior expectation to take on risk decreases aversion to both the anticipated and additional risk for large scale risk the model allows for standard consumption utility to dominate reference dependent gain loss utility generating nearly identical risk aversion across situations

individual preferences monetary gambles and stock market participation a case for narrow framing we argue that narrow framing whereby an agent who is offered a new gamble evaluates that gamble in isolation may be a more important feature of decision making than previously realized our starting point is the evidence that people are often averse to a small independent gamble even when the gamble is actuarially favorable we find that a surprisingly wide range of utility functions including many nonexpected utility specifications have trouble explaining this evidence but that this difficulty can be overcome by allowing for narrow framing our analysis makes predictions as to what kinds of preferences can most easily address the stock market participation puzzle

liar s loan effects of origination channel and information falsification on mortgage delinquency 1 this paper presents an analysis of mortgage delinquency between 2004 and 2008 using a loan level data set from a major national mortgage bank our analysis highlights two problems underlying the mortgage crisis a reliance on mortgage brokers who tend to originate lower quality loans and a prevalence of low documentation loans known in the industry as liar s loans that result in borrower information falsification while over three quarters of the difference in delinquency rates between bank and broker channels can be attributed to observable loan and borrower characteristics the delinquency difference between full and low documentation mortgages is due to unobservable heterogeneity about half of it potentially due to income falsification

a theory of dynamic oligopoly ii price competition kinked demand curves and edgeworth cycles we provide game theoretic foundations for the classic kinked demand curve equilibrium and edgeworth cycle we analyze a model in which firms take turns choosing prices the model is intended to capture the idea of reactions based on short run commitment in a markov perfect equilibrium mpe a firm s move in any period depends only on the other firm s current price there are multiple mpe s consisting of both kinked demand curve equilibria and edgeworth cycles in any mpe profit is bounded away from the bertrand equilibrium level we show that a kinked demand curve at the monopoly price is the unique symmetric renegotiation proof equilibrium when there is little discounting we then endogenize the timing by allowing firms to move at any time subject to short run commitments we find that firms end up alternating thus vindicating the ad hoc timing assumption of our simpler model we also discuss how the model can be enriched to provide explanations for excess capacity and market sharing keiiwords tacit collusion markov perfect equilibrium kinked demand curve edgeworth cycle excess capacity market sharing endogenous timing

the effect of specialty coffee certification on household livelihood strategies and specialisation abstract farm certification is rapidly becoming a sine qua non for access to specialty coffee markets at the centre of these changes are smallholder coffee producers responsible for 80 of global coffee production although rural households are known to depend on more than agricultural production alone the literature on specialty coffee and certification has rather narrowly focused on coffee income and production in this study broader impacts are explicitly taken into account household income was decomposed into categories corresponding to specific income generating activities and coffee income was broken down into price yield and area effects results show that coffee certification encourages farmers to specialise in coffee production increasing coffee income but not total household income at least not in the short run the time and effort required to attain the higher coffee income offered by certified production means farmers have to give up other activities this substitution effect cancels out the income effect such that there is no increase in total household income the lack of an effect on total household income suggests the return to the additional labour effort required for certified coffee production is not higher than in other activities questioning the benefits of certification for small scale producers

dealer price discrimination in new car purchases evidence from the consumer expenditure survey this paper documents the variation in dealer discounts for new cars using transactions price data from the consumer expenditure survey consumer specific characteristics fail to explain dealer discounts whereas model market specific and purchase transaction variables e g first time purchase trade in and financing through dealer do explain them the results contradict earlier findings of race and gender discrimination based on a controlled experiment this contradiction is reconciled by examining the higher moments of the empirical discount distribution while mean and median markups do not vary by race and gender minority purchases are characterized by higher dispersion this may rationalize the disparate treatment of minorities by dealers documented in the controlled experiment

the coexistence of stable equilibria under least squares learning abstract in this paper we consider firms that learn about market conditions by estimating the demand function using past market data we show that learning may lead to suboptimal outcomes even when the estimated demand function perfectly fits the observations used in the regression and firms thus perceive to have learned the demand function correctly we consider the salop model with three firms and two types of consumers that differ in their sensitivity to product differences firms do not know the demand structure and they apply least squares learning to learn the demand function in each period firms estimate a linear perceived demand function and they play the perceived best response to the previous period price of the other firms this learning rule can lead to three different outcomes a self sustaining equilibrium the nash equilibrium or an asymmetric learning equilibrium in this last equilibrium one firm underestimates the demand for low prices and it attracts consumers with high sensitivity only this type of equilibrium has not been found in the literature on least squares learning before both the nash equilibrium and the asymmetric learning equilibrium are locally stable therefore the model has coexisting stable equilibria

the bright side of loss aversion in dynamic and competitive markets a well established phenomenon of consumer buying behavior is that consumers evaluate prices relative to a reference point and exhibit loss aversion i e their propensity to buy is more negatively affected by prices above the reference point than it is positively affected by prices below the reference point the objective of this paper is to analytically examine how the competitive strategy and profitability of firms are affected by the presence of consumer loss aversion in the price dimension although we assume that consumer loss aversion increases consumer propensity to search for lower prices we find that it does not necessarily lead to lower prices or profits when firms compete over multiple periods and when the consumer reference price in subsequent periods is affected by current prices specifically consumer loss aversion could lead to higher prices and profits when consumer valuation is sufficiently high relative to search costs and the proportion of consumers with positive search costs is in an intermediate range we also show that when forward looking firms incorporate the negative effect of price promotions on future profits the equilibrium range of price promotions may actually increase

on the welfare effects and political economy of competition enhancing policies we analyse the welfare effects of policies that intensify product market competition and the channels through which they operate using a circular model of horizontal product differentiation with asymmetric costs we study the effects of increased price competition on market selection among incumbent firms cost reduction effort and entry of new firms the model also generates an endogenous demand for competition enhancing or retarding policies arising from cost heterogeneity and we demonstrate the possibility of a low competition political economy trap simulations of the model illustrate that the selection effects we analyse which traditional cost benefit analysis is unlikely to capture can be large

advertising as signal jamming abstract this paper considers a model of informative advertising that allows firms to jam the consumers signals on product quality before choosing prices at a second stage we find that the price competition at the second stage may overrule the basic insights from the signal jamming approach in other areas of application as a consequence a firm may advertise more intensely the higher is the difference of the expected product qualities moreover a firm s optimal advertising intensity can decrease with quality uncertainty

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

duopolistic competition with choice overloaded consumers a large body of experimental work has suggested the existence of a choice overload effect in consumer decision making faced with large menus of choice options decision makers often defer or avoid choice a suggested reason for the occurrence of this effect is that the agents attempt to avoid the cognitive effort that is associated with choosing from larger menus building on this explanation we propose and analyse a model of duopolistic competition where firms compete in menu design in the presence of a consumer population with heterogeneous preferences and overload menu size thresholds the firms strategic trade off is between offering a large menu in order to match the preferences of as many consumers as possible and offering a small menu in order to avoid losing choice overloaded consumers to their rival assuming uniformly distributed preferences we focus on symmetric pure strategy equilibria under various assumptions on the overload distribution and product markups we also propose and analyse a measure of consumer welfare that applies to this environment among other things we provide conditions for maximum and minimum variety equilibria to be possible whereby both firms either offer the entire set of available products or the same one product respectively

staying ahead and getting even risk attitudes of experienced poker players abstract frequent online poker players with extensive experience calculating probabilities and expected values might be expected to behave as expected utility maximizers in that small shocks to their wealth would not affect risk preferences rabin 2000 by contrast reference dependent loss aversion as in prospect theory koszegi and rabin 2006 kahneman and tversky 1979 predicts that risk aversion decreases as wealth moves away from the reference point in either direction in terms of continuing to play as well as a more aggressive playing style we find strong evidence for the break even effect the increased pursuit of risk as a player is losing within a session players behavior also appears consistent with existing evidence on reference dependent labor supply in their tendency to reduce effort and risk taking in response to being ahead our findings provide evidence for reference dependent behavior in a flexible high skilled setting under conditions of well understood monetary risk

a news utility theory for inattention and delegation in portfolio choice recent evidence suggests that investors are inattentive to their portfolios and hire expensive portfolio managers this paper develops a life cycle portfolio choice model in which the investor experiences loss averse utility over news and can ignore his portfolio in such a model the investor prefers to ignore and not rebalance his portfolio most of the time because he dislikes bad news more than he likes good news such that expected news causes a first order decrease in utility consequently the investor has a first order willingness to pay a portfolio manager who rebalances actively on his behalf moreover the investor can diversify over time and his consumption aligns with predictions of mental accounting i structurally estimate the preference parameters by matching stock shares and stock market non participation over the life cycle my parameter estimates are in line with the literature generate reasonable intervals of inattention and simultaneously explain consumption and wealth accumulation over the life cycle here it matters that news utility preserves first order risk aversion even in the presence of stochastic labor income which also causes stock shares to rise in wealth

sticky prices new evidence from retail catalogs this paper presents new results on the size frequency and synchronization of price changes for twelve selected retail goods over the past 35 years three basic facts about the data are uncovered first nominal prices are typically fixed for more than one year although the time between changes is very irregular second prices change more often during periods of high overall inflation third when prices do change the sizes of the changes are widely dispersed both large and small changes occur for the same item and the sizes of these changes do not closely depend on overall inflation

rates for vehicle loans race and loan source a household s vehicle purchases are among its largest expenditure outlays moreover unlike housing purchases which a typical household may make once or twice over a lifetime a house hold may well buy several cars over the same interval the magnitude and relative frequency of vehicle purchases suggest that differential treatment by race in the vehicle market may have important implications for differences in wealth and financial well being by race yet whereas a robust literature in economics has studied virtu

international commodity agreements an obituary notice abstract it is widely believed that international commodity agreements have lapsed because they have failed the reality is more complex the tin agreement did collapse but for sugar and cocoa adverse market conditions and lack of general support made stabilization impractical control of the coffee market ceased largely because of disagreements both between and within the producing countries on the division of the benefits resulting from higher prices overall commodity control fits uneasily in an increasingly globalized and competitive world and this perception has resulted in a diminished willingness to resolve the practical difficulties of price stabilization

consumer loss aversion product experimentation and tacit collusion abstract two firms compete to attract loss averse consumers that are uncertain about how well the goods on sale fit their needs to resolve valuation uncertainty firms can allow prospective customers to test experiment their products before purchase we investigate firms dynamic incentives to allow experimentation and analyze the resulting effects on the profitability and the stability of tacit collusion depending on the regulatory regime in place i e whether experimentation is forbidden mandated or simply allowed but not imposed laissez faire the degree of loss aversion has ambiguous effects both on the profits that firms can achieve through tacit collusion and on the stability of these agreements while in static environments consumer welfare is always maximized by a policy that forbids experimentation the opposite happens in a dynamic environment

altruistic dynamic pricing with customer regret altruistic dynamic pricing with customer regret a model is considered in which firms internalize the costly regret that consumers experience when prices change unexpectedly this regret is greater when prices change by more and this can explain why the actual size of price increases for firms with rigid prices is less sensitive to inflation than in models with fixed costs of changing prices regret costs of this form also lead to more variable price changes than fixed costs do last the practice of announcing price increases in advance is easier to rationalize with regret concerns by consumers than with more standard approaches to price rigidity

uncertain demand consumer loss aversion and flat rate tariffs we consider a model of firm pricing and consumer choice where consumers are loss averse and uncertain about their future demand possibly consumers in our model prefer a flat rate to a measured tariff even though this choice does not minimize their expected billing amount a behavior in line with ample empirical evidence we solve for the profit maximizing two part tariff which is a flat rate if a marginal costs are not too high b loss aversion is intense and c there are strong variations in demand moreover we analyze the optimal nonlinear tariff this tariff has a large flat part when a flat rate is optimal among the class of two part tariffs

car ownership and the labor market of ethnic minorities we show how initial wealth differences between low skilled minorities and white workers can generate differences in their labor market outcomes this even occurs in the absence of a taste for discrimination against ethnic minorities or exogenous differences in distance to jobs because of the initial wealth difference minorities cannot afford to buy a car while whites can car ownership allows whites to reach more jobs per unit of time which gives them a better bargaining position in the labor market as a result in equilibrium ethnic minorities end up with both higher unemployment rates and lower wages than whites furthermore we also show that it takes more time for minorities to reach their jobs even though they travel less miles when employed those predictions are consistent with the data better access to capital markets or better public transportation will reduce the differences in labor market outcomes

altruistic dynamic pricing with customer regret a model is considered in which firms internalize the costly regret that consumers experience when prices change unexpectedly this regret is greater when prices change by more and this can explain why the actual size of price increases for firms with rigid prices is less sensitive to inflation than in models with fixed costs of changing prices regret costs of this form also lead to more variable price changes than fixed costs do last the practice of announcing price increases in advance is easier to rationalize with regret concerns by consumers than with more standard approaches to price rigidity

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

consumer price and promotion expectations an experimental study the authors report results from a controlled experiment designed to investigate the impact of a brand s price promotion frequency and the depth of promotional price discounts on the price consumers

reference dependent utility product variety and price competition products such as nike running shoes gillette razors and gatorade sports drink serve as the standard against which consumers evaluate other members of the category empirical evidence suggests that consumers care about not only the consumption utility derived from a product but also the gain loss utility in comparison to the reference product of the category this paper examines how reference dependent utility affects price competition in a horizontally differentiated market where consumers tastes are diverse when consumer valuations are low the reference product is priced lower than a nonreference product in contrast when consumer valuations are high the reference product is priced higher than a nonreference product moreover loss aversion on the price dimension always intensifies competition among low valuation goods whereas loss aversion on the taste dimension softens competition among high valuation goods only if consumer sensitivity to the difference in match quality is above a threshold we also find that an increase in the diversity of consumers tastes reduces equilibrium profits if consumer valuation is low but has the opposite effect if consumer valuation is high we further explore how an increase in the popularity of the reference product affects price competition finally we assess the robustness of the findings by extending the model in different directions the online appendix is available at https doi org 10 1287 mnsc 2017 2834 this paper was accepted by juanjuan zhang marketing

binary payment schemes moral hazard and loss aversion we modify the principal agent model with moral hazard by assuming that the agent is expectation based loss averse according to k o szegi and rabin 2006 2007 the optimal contract is a binary payment scheme even for a rich performance measure where standard preferences predict a fully contingent contract the logic is that due to the stochastic reference point increasing the number of different wages reduces the agent s expected utility without providing strong additional incentives moreover for diminutive occurrence probabilities for all signals the agent is rewarded with the fixed bonus if his performance exceeds a certain threshold

credit card redlining abstract this paper evaluates the presence of racial disparities in the issuance of consumer credit using a database of credit histories i link location based information on race with individual credit files after controlling for place specific factors such as housing vacancy rates and general population demographics i find qualitatively large differences in the amount of credit offered to similarly qualified applicants living in black versus white areas high data quality allows distinguishing between issuer provision supply and utilization of credit demand additional estimates using information on payday lending provide support for idea that issuers condition lending on location

income portfolios in rural ethiopia and tanzania choices and constraints the article analyses the different income portfolios of households using survey data from rural ethiopia and rural tanzania it suggests that the different portfolios held by households cannot be e

intertemporal incentives under loss aversion this paper studies the intertemporal allocation of incentives in a repeated moral hazard model with reference dependent preferences as in k oszegi and rabin 2009 besides consumption utility the agent experiences utility from the change in his beliefs about present and future eort and income when eort plans are rational the prospect of being disappointed by the outcome realization equals that of being pleasantly surprised and hence the loss averse agent is on net hurt by news in contrast to the prediction with classical preferences but consistent with real world contracts if consumption utility is not too concave and news about present income carries suciently larger weight in utility than news about future income a contract setting a current

goals and bracketing under mental accounting abstract behavioral economics struggles to explain why people sometimes evaluate outcomes separately narrow bracketing of mental accounts and sometimes jointly broad bracketing we develop a theory of endogenous bracketing where people set goals to tackle self control problems goals induce reference points that make substandard performance painful evaluating goals in a broadly bracketed mental account insulates an individual from exogenous risk of failure but because decisions or risks in different tasks become substitutes there are incentives to deviate from goals that are absent under narrow bracketing extensions include goal revision naivete about self control income targeting and firms bundling strategies

the transition to home ownership and the black white wealth gap this paper analyzes differences in the likelihood that black and white families become homeowners by following a sample of black and white renters over time we are able to separately study racial differences in the likelihood of applying for a mortgage and in the likelihood that a mortgage application is accepted although its effect on the race gap in housing transitions is small we find strong evidence that black applicants are almost twice as likely as comparable white households to be rejected even when credit history proxies and measures of household wealth are accounted for we show that the housing transition gap exists primarily because blacks are less likely to apply for mortgages in the first place the analysis suggests that differences in income family structure and in the ability and willingness of parents to provide down payment assistance are the primary reasons for this applications gap we speculate that the portion of the gap that remains unexplained after controlling for income d

sticky prices in a dynamic oligopoly an investigation of s s thresholds abstract the strategic implications of costly price adjustment are investigated empirically i assume that managers are engaged in a state space game and ask if the dynamic considerations that arise when they condition their choices on the state cause prices to be more or less rigid than when players use more myopic pricing rules the answer to this question depends on a parametric specification of the problem that lends itself to empirical assessment the micro panel data used to investigate this issue consist of weekly prices sales costs and promotional activity for three brands of saltine crackers sold by four chains of grocery stores in a small us town i find that in this market strategic behavior exacerbates price rigidity the thresholds are wider and the time between changes is longer than would be observed in a more myopic setting

expected prices as reference points theory and experiments abstract i show theoretically that applying the model of k szegi and rabin 2006 to a simple purchasing decision where consumers are ex ante uncertain about the price realisation gives when changing the underlying distribution of expected prices rise to counterintuitive predictions in contrast with a good deal model where consumers are predicted to be disappointed rejoice when the realised price is perceived as being worse better than the other possible realisation while the underlying ideas of both models are similar with respect to expectation based reference points the different results come from the concept of personal equilibrium in k szegi and rabin 2006 the experimental results show some support for the simpler good deal model for a number of different real consumption goods though the support is weaker for goods that either have a salient market price or no market price outside of the experiment

the rigidity of prices this paper uses evidence on individual transaction prices to analyze price behavior the evidence shows that for many transactions pricesremain rigid for periods exceeding one year the rigidity of price ispositively correlated with industry concentration for several productsthe correlation of price changes across buyers is low the paper alsoinvestigates the relationship between price rigidity price change andthe length of time a buyer and seller have been doing business together the author interprets the evidence as emphasizing the importance of nonprice rationing and the inadequacy of models in whichprice movements alone clear markets copyright 1986 by american economic association

de targeting advertising an assortment of products to loss averse consumers we consider product markets in which consumers are interested only in a specific product category and initially do not know which product category matches their tastes using sophisticated tracking technologies an intermediary can make inferences about a consumer s preferred product category and offer advertising firms the possibility to target their ads to match the consumer s taste such targeting reduces overall advertising costs and as a direct effect increases industry profits however as we show in this paper when consumers form reference prices and are loss averse more precise targeting may intensify competition between firms as a result firms may earn higher profits from de targeted advertising i e when the intermediary deliberately informs about some products and their price quotes from outside a consumer s preferred product category

consumer inertia choice dependence and learning from experience in a repeated decision problem abstract understanding when and how individuals think about real life problems is a central question in economics this paper studies the role of inertia inattention state dependence and learning the empirical setting is a tariff experiment when optional measured tariffs for local telephone calls were introduced unanticipatedly we find that consumers tend to align their choices of tariff and telephone use levels correctly despite low potential savings mistakes are not permanent as individuals actively engage in tariff switching in order to reduce the monthly cost of telephone service ignoring unobservable heterogeneity and the endogeneity of past choices would have reversed these results

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

markdown or everyday low price the role of behavioral motives we study a seller s optimal pricing and inventory strategies when behavioral nonpecuniary motives affect consumers purchase decisions in particular the seller chooses between two pricing strategies markdown or everyday low price and determines the optimal prices and inventory level two salient behavioral motives that impact consumers purchase decisions and the seller s optimal strategies are anticipated regret and misperception of product availability regret arises when a consumer initially chooses to wait but encounters stockout later or when the consumer buys the product at the high price but realizes that the product is still available at the markdown price in addition consumers often perceive the product s future availability to be different than its actual availability we determine and quantify that both regret and availability misperception have significant operational and profit implications for the seller for example ignoring these behavioral factors can result in up to 10 profit

expectation based loss aversion and strategic interaction abstract by extending the equilibrium concepts of k szegi and rabin 2006 k szegi and rabin 2007 this paper analyzes the strategic interaction of expectation based loss averse players for loss averse players with choice acclimating expectations the utility from playing a mixed strategy is not linear but convex in the probabilities they assign to their pure strategies as a consequence they are generally unwilling to randomize and an equilibrium may fail to exist for players with choice unacclimating expectations by contrast randomizing over their pure strategies may indeed constitute a credible best response and an equilibrium always exists building upon these insights we delineate how expectation based loss averse players differ in their strategic behavior from their counterparts with standard expected utility preferences derive novel strategic effects discuss equilibrium selection and derive equilibrium play for some simple games

expectations as reference points field evidence from professional soccer we show that professional soccer players and their coaches exhibit reference dependent behavior during matches controlling for the state of the match and for unobserved heterogeneity we show on a minute by minute basis that players breach the rules of the game measured by the referee s assignment of cards significantly more often if their teams are behind the expected match outcome measured by preplay betting odds of large professional bookmakers we further show that coaches implement significantly more offensive substitutions if their teams are behind expectations both types of behaviors impair the expected ultimate match outcome of the team which shows that our findings do not simply reflect fully rational responses to reference dependent incentive schemes of favorite teams to falling behind we derive these results in a data set that contains more than 8 200 matches from 12 seasons of the german bundesliga and 12 seasons of the english premier league this paper was accepted by uri gneezy behavioral economics

portfolio choice in personal equilibrium abstract this paper finds that in portfolio choice where reference point arises endogenously in personal equilibria investors behave as if they had a concave probability weighting function this finding establishes a link between the reference dependent utility and the rank dependent utility theories

automobile prices in market equilibrium with unobserved price discrimination in markets where sellers are able to price discriminate or the buyers to bargain individuals receive discounts over the posted prices that are usually not observed by the econometrician this paper considers the structural estimation of a demand and supply model a la berry et al 1995 when only posted prices are observed we consider that heterogeneous discounts occur due to price discrimination by firms on observable characteristics of consumers within this framework identification is achieved by assuming that the marginal costs of producing and selling the goods do not depend on the characteristics of the buyers we also require a condition relating the posted prices to the prices actually paid for instance we can assume that at least one group of individuals pays the posted prices under these two conditions the demand and supply parameters as well as the exact discounts corresponding to each type of consumers can be identified we apply our methodology to estimate the demand and supply in the new automobile market in france results suggest that discounting arising from price discrimination is important the average discount is estimated to be 10 5 with large variation depending on the buyers characteristics and cars specifications our results are in line with discounts generally observed in european and american automobile markets

reference points and effort provision a key open question for theories of reference dependent preferences is what determines the reference point one candidate is expectations what people expect could affect how they feel about what actually occurs in a real effort experiment we manipulate the rational expectations of subjects and check whether this manipulation influences their effort provision we find that effort provision is significantly different between treatments in the way predicted by models of expectation based reference dependent preferences if expectations are high subjects work longer and earn more money than if expectations are low

loss aversion and inefficient renegotiation we propose a theory of inefficient renegotiation that is based on loss aversion when two parties write a long term contract that has to be renegotiated after the realization of the state of the world they take the initial contract as a reference point to which they compare gains and losses of the renegotiated transaction we show that loss aversion makes the renegotiated outcome sticky and materially inefficient the theory has important implications for the optimal design of long term contracts first it explains why parties often abstain from writing a beneficial long term contract or why some contracts specify transactions that are never ex post efficient secondly it shows under what conditions parties should rely on the allocation of ownership rights to protect relationship specific investments rather than writing a specific performance contract thirdly it shows that employment contracts can be strictly optimal even if parties are free to renegotiate