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

drugs policy what should we do about cannabis public policy has failed to prevent large scale consumption of cannabis in most developed countries so what if anything should we do to change the policy environment cannabis consumption is unambiguously harmful in several ways but this does not automatically justify the prohibitionist policy dictated by the international drugs conventions this paper sets out the arguments for policy intervention in the cannabis market and reviews the directions of policy change that have been called for we argue that existing theoretical insights and empirical evidence give little compelling reason to prefer prohibition to the alternative of legalization of cannabis with harms controlled by regulation and taxation given this conclusion and the much wider prevalence of cannabis than of harder drugs a reasonable way forward is to remove cannabis production and consumption but not trade from the current prohibitionist un drug control treaties to allow countries to adopt their own policies thus generating new evidence on the potential impacts of a wider range of policy stephen pudney

is addiction rational theory and evidence this paper makes two contributions to the modeling of addiction first we provide new and convincing evidence that smokers are forward looking in their smoking decisions using state excise tax increases that have been legislatively enacted but are not yet effective and monthly data on consumption second we recognize the strong evidence that preferences with respect to smoking are time inconsistent with individuals both not recognizing the true dife culty of quitting and searching for self control devices to help them quit we develop a new model of addictive behavior that takes as its starting point the standard rational addiction model but incorporates time inconsistent preferences this model also exhibits forward looking behavior but it has strikingly different normative implications in this case optimal government policy should depend not only on the externalities that smokers impose on others but also on the internalities imposed by smokers on themselves we estimate that the optimal tax per pack of cigarettes should be at least one dollar higher under our formulation than in the rational addiction case

rational addiction with learning and regret we present a theory of rational behavior in which individuals maximize a set of stable preferences over goods with unknown addictive power the theory is based on three fundamental postulates that consumption of the addictive good is not equally harmful to all that individuals possess subjective beliefs concerning this harm and that beliefs are optimally undated with information gained through consumption although individual actions are optimal and dynamically consistent addicts regret their past consumption decisions and regret their initial assessment of the potential harm of the good addict prone individuals who believe it could not happen to them are most likely to be drawn into a harmful addiction

international evidence on tradables and nontradables inflation abstract using 1970 1985 sectoral data for the oecd we find that inflation in nontradable goods exceeds inflation in tradables we identify a demand shift towards nontradables and faster growth of total factor productivity in the tradable goods sector as the prime causes of the differential inflation in addition disinflation attempts and the exchange rate regime appear to have exerted significant influence on the relative inflation rate

the fourfold pattern of risk attitudes in choice and pricing tasks we examine the robustness of the fourfold pattern of risk attitudes under two elicitation procedures we find that individuals are on average risk seeking over low probability gains and high probability losses and risk averse over high probability gains and low probability losses when we elicit prices for the gambles however a choice based elicitation procedure where participants choose between a gamble and its expected value yields individual decisions that are indistinguishable from random choice sensitivity to elicitation procedure holds between and within participants and remains when participants are allowed to review and change decisions the price elicitation procedure is more complex this finding may be further evidence that an increase in cognitive load exacerbates behavioural anomalies

emergent complexity in agent based computational economics abstract in this paper we shall review two kinds of emergent complexity in agent based computational economics ace the first kind is based on the complex systems initiated in the 1980s or even earlier by mathematicians and physicists whereas the second kind is based on the idea of complex adaptive systems composed of autonomous agents for which many representative works have been collected in rosser for the latter we shall go further to examine the two elements which have just recently been incorporated in agent based economic modelling namely intelligence and modularity this augmentation leads to the development of neurocognitive software agents which can guide the generation and direction of future ace studies with a multistage brain behaviour to emergency to brain behaviour approach

risk and rationalization the role of affect and cognitive dissonance for sexual risk taking this paper analyzes the mechanisms underlying excessive sexual risk taking in the presence of hiv drawing ideas from psychology on decision making processes and risk evaluation a theoretical mode

toward choice theoretic foundations for behavioral welfare economics interest in behavioral economics has grown in recent years stimulated largely by accumulating evidence that the standard model of consumer decision making provides an inadequate positive description of human behavior behavioral models are increasingly finding their way into policy evaluation which inevitably involves welfare analysis no consensus concerning the appropriate standards and criteria for behavioral welfare analysis has emerged yet this paper summarizes our effort to develop a unified framework for behavioral welfare economics for a detailed discussion see bernheim and rangel 2007 one that can be viewed as a natural extension of standard welfare economics standard welfare analysis is based on choice not on utility or preferences in its simplest form it instructs the planner to respect the choices an individual would make for himself the guiding normative principle is an extension of the libertarian deference to freedom of choice which takes the view that it is better to give a person the thing he would choose for himself rather than something that someone else would choose for him we show that it is possible to extend the standard choice theoretic approach to welfare analysis to situations where individuals make inconsistent choices which are prevalent in behavioral economics

affective decision making a theory of optimism bias abstract optimism bias is inconsistent with the independence of decision weights and payoffs found in models of choice under risk and uncertainty such as expected utility theory subjective expected utility and prospect theory we therefore propose an alternative model of risky and uncertain choice where decision weights affective or perceived risk are endogenous affective decision making adm is a strategic model of choice under risk and uncertainty where we posit two cognitive processes the rational and the emotional process the two processes interact in a simultaneous move intrapersonal potential game and observed choice is the result of a pure strategy nash equilibrium in this game we show that regular adm potential games have an odd number of locally unique pure strategy nash equilibria and demonstrate this finding for affective decision making in insurance markets we prove that adm potential games are refutable by axiomatizing the adm potential maximizers

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

the industrial mobility of displaced workers this article uses a two industry model of unemployment duration and job search to estimate rates of transition of displaced workers from unemployment to employment distinguishing between employment in a worker s previous industry and in other industries the competing risks model allows inferences about search strategies to be drawn from data concerning employment outcomes and allows tests of some fundamental implications of search theory there is evidence that improvements in the prospects for employment in their previous industry induce displaced workers to reduce search intensity or increase reservation wages in other industries

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

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

the effects of banning advertising in junk food markets we develop a structural model to analyze the eects of banning advertising on market equilibria and welfare in junk food markets we consider the impact on demand and prices and show how to quantify welfare eects when advertising might lead consumers to take decisions that are inconsistent with their underlying preferences we use transaction level data on the potato chips market and nd that banning advertising leads to a direct reduction in demand but also toughens price competition leading to lower prices and increased demand welfare increases as consumers benet from no longer making distorted

alcohol and self control a field experiment in india this paper studies alcohol consumption among low income workers in india in a 3 week field experiment the majority of 229 cycle rickshaw drivers were willing to forgo substantial monetary payments in order to set incentives for themselves to remain sober thus exhibiting demand for commitment to sobriety randomly receiving sobriety incentives significantly reduced daytime drinking while leaving overall drinking unchanged i find no evidence of higher daytime sobriety significantly changing labor supply productivity or earnings in contrast increasing sobriety raised savings by 50 percent an effect that does not appear to be solely explained by changes in income net of alcohol expenditures

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

auctionin entry into tournaments a research tournament model with heterogeneous contestants is presented for a large class of contests the optimal number of competitors is two this insight makes designing the tournament easier and highlights the importance of selecting highly qualified contestants while customary uniform price and discriminatory price auctions are intuitively appealing mechanisms for solving this adverse selection problem in practice they generally will not be efficient mechanism for selecting contestants instead we propose an alternative auction format that is equally simple to implement and efficiently selects the most qualified contestants to compete regardless of the form of contestant heterogeneity

consumer demand under price uncertainty empirical evidence from the market for cigarettes abstract we develop a demand model for goods that are subject to habit formation we show that consumption plans of forward looking individuals depend on preferences current period prices and ind

theories of the mind economics has traditionally relied on revealed preferences and occasionally on verbal reports to understand the desires of people another source of information has been developed in recent years the direct observation of choice processes this mechanism possible thanks to the improvements in the designs and techniques to measure brain activity is explored in the bur geoning field of experimental neuroeconom ics see paul w glimcher and aldo rustichini 2004 and colin camerer george loewenstein and drazen prelec 2005 for recent surveys in this article we argue that the evidence on brain activity can also be used to build theo retical models that help us understand choices and predict behaviors we label this research neuroeconomic theory in section i we describe the procedure discuss some advan tages over traditional methodologies and estab lish some facts that motivate our approach in section ii we illustrate the methodology with two brain based models of decision making i what is neuroeconomic theory neuroeconomic theory is an interdisciplin ary line of investigation that combines research from neuroscience neurobiology and econom ics experimental neuroscience and neurobiology provide detailed evidence of the functionality interconnectivity and physiological constraints of the brain systems involved in decision making microeconomic theory supplies the toolkit to build simple optimization models that incorporate these network interactions and well defined con straints into the mechanisms of choice

the economic case against drug prohibition this paper discusses the costs and benefits of drug prohibition it offers a detailed outline of the economic consequences of drug prohibition and a systematic analysis of the relevant empirical evidence the bottom line is that a relatively free market in drugs is likely to be vastly superior to the current policy of prohibition

optimal sin taxes abstract we investigate sin taxes on unhealthy items such as fatty foods that people may by their own reckoning consume too much of we employ a standard optimal taxation framework but replace the standard assumption that all consumers have 100 self control with an assumption that some consumers may have some degree of self control problems we show that imposing taxes on unhealthy items and returning the proceeds to consumers can generally improve total social surplus because such taxes counteract over consumption by consumers with self control problems while at the same time they naturally redistribute income to consumers with no self control problems who consume less such taxes can even create pareto improvements finally we demonstrate with some simple numerical examples that even if the population exhibits relatively few self control problems optimal taxes can still be large

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

pavlovian processes in consumer choice the physical presence of a good increases willingness to pay this paper describes a series of laboratory experiments studying whether the form in which items are displayed at the time of decision affects the dollar value that subjects place on them using a becker degroot auction under three dif ferent conditions i text displays ii image displays and iii displays of the actual items we find that subjects willingness to pay is 40 61 percent larger in the real than in the image and text displays furthermore follow up experi ments suggest the presence of the real item triggers preprogrammed consum matory pavlovian processes that promote behaviors that lead to contact with appetitive items whenever they are available

does unmeasured ability explain inter industry wage differentials this paper provides empirical assessments of the two leading explanations of measured inter industry wage differentials 1 true wage differentials exist across industries and 2 the measured differentials simply reflect unmeasured differences in workers productive abilities first we summarize the existing evidence on the unmeasured ability explanation second we construct a simple model which shows that if matching is important then endogenous job change decisions can create important self selection biases even in first differenced estimates of industry wage differentials third we analyze a sample that approximates the experiment of exogenous job loss we find that i the wage change experienced by a typical industry switcher closely resembles the difference in the relevant industry differentials estimated in a cross section and ii pre displacement industry affiliation plays an important role in post displacement wage determination

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

competition policy rivalries and defense industry consolidation declining outlays for new weapons programs have triggered a process of consolidation that promises to shrink the u s defense industry drastically consolidation in the defense industry raises complex competition policy issues that are not amenable to conventional antitrust merger analysis this paper presents a framework for identifying important contractor competencies assessing rivalries in defense industry segments and evaluating the competitive effects of mergers and other consolidation events as applied to antitrust oversight and to department of defense funding program and acquisition strategy decisions this framework can help preserve supply alternatives for developing state of the art weapons needed to satisfy national security requirements

the influence of traded and nontraded wages on relative prices and real exchange rates abstract this work demonstrates for fourteen oecd economies that wage differentials between traded and nontraded goods significantly affect the relative price of nontradeables and the real exchange rate in the short and medium run 1997 elsevier science s a

the value of the revolving door political appointees and the stock market abstract we analyze stock market reactions to announcements of political appointments from the private sector and corporate appointments of former government officials using unique data on corporate affiliations and announcements of all senate confirmed u s defense department appointees of six administrations we find positive abnormal returns for political appointments these estimates are not driven by important observations volatile stocks industry wide developments or the omission of further commonly used return predictors placebo events for close competitors and alternative dates yield no effects effects are larger for top government positions and less anticipated announcements we also find positive abnormal returns for corporate appointments and positive effects of political connections on procurement volume our results suggest that concerns over conflicts of interest created by the revolving door seem justified even in a country with strong institutions

the brain as a hierarchical organization based on recent neuroscience evidence we model the brain as a dual system organization subject to three conflicts asymmetric information temporal hori zon and incentive salience under the first and second conflicts we show that the uninformed system imposes a positive link between consumption and labor at every period furthermore decreasing impatience endogenously emerges as a consequence of these two conflicts under the first and third conflicts it becomes optimal to set a consumption cap finally we discuss the behavioral implications of these rules for choice bracketing and expense tracking and for consumption over the life cycle jel dil d74 d82 d87 d91

neuroeconomic studies of impulsivity now or just as soon as possible existing behavioral studies of intertemporal choice suggest that both human and animal choosers are impulsive one possible explanation for this is that they discount future gains in a hyperbolic or quasi hyperbolic fashion david i laibson 1997 shane frederick george loewenstein and ted o donoghue 2002 this observation stands in contrast to standard normative theory which predicts exponential discounting for any single maximizing agent robert h strotz 1956 this disparity between empirical and normative approaches is typically explained by proposing that human choosers suffer from inner conflict balancing an impulse for an immediate gratification against other forces calling for delayed gratification richard h thaler and h m shefrin 1981 laibson 1997 drew fudenberg and david k levine 2006 jess benhabib and alberto bisin 2005 b douglas bernheim and antonio rangel 2004 faruk gul and wolfgang pesendorfer 2001 we hoped to better understand both the behavioral and algorithmic roots of this phenomenon by conducting a series of behavioral and neurobiological experiments on intertemporal choice the results of our behavioral experiments deviate significantly from the predictions of both normative and inner conflict models the results of our neurobiological experiments provide new algorithmic insights into the mechanisms of intertemporal choice decision theory new methods new insights

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

energy use and temperature habituation evidence from high frequency thermostat usage data using micro level thermostat data from 27 000 u s households we analyze how home heating cooling decisions respond to weather responses are greater for extreme heat than for extreme cold and persist for at least 30 days after exposure due in part to transaction costs but also to changes in intrinsic preferences failure to understand habit can lead us to overestimate the impact of short term policy nudges but underestimate the long run impact of small changes higher frequency estimates of how behavior responds to weather improve our understanding of climate adaptation as climate change affects not only mean temperatures but also variances jel c55 d03 q4

sectoral shifts and interindustry wage differentials the observed differences in wages across industries may arise from a lack of worker mobility particularly among experienced workers allowing the effects of industry shocks to persist for some time although young workers arbitrage wage shocks they will have little effect on the dispersion of experienced workers wages if young and old workers are poor substitutes in production this explanation is investigated using the five censuses of population between 1940 and 1980 the evidence strongly suggests that differences in pay are not temporary phenomena the data provide some support for the role of human capital and ability