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

the denomination effect labeled the denomination effect study 1 shows in three field studies that the likelihood of spending is lower when an equivalent sum of money is represented by a single large denomination e g one 20 bill relative to many smaller denominations e g 20 1 bills in two of the three field studies individuals spent more once the decision to spend had been made study 2 then shows that consumers deliberately choose to receive money in a large denomination relative to small denominations when there is a need to exert self control in spending study 3 further shows that the denomination effect is contingent on individual differences in people s desire to reduce the pain of paying associated with spending the results suggest that the denomination effect occurs because large denominations are psychologically less fungible than smaller ones allowing them to be used as a strategic device to control and regulate spending

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

time inconsistent preferences and the annuitization decision good news can involve difficult decisions for example winning a lottery jackpot can go along with the decision whether to have the jackpot paid out immediately as a lump sum or as periodic annual payments also when entering retirement most people face the decision whether they want their defined contribution account balance paid as a lump sum or to annuitize that amount the fact that people tend to choose the lump sum even if economic reasons suggest that they should choose the annuity is called the annuity paradox in a large online survey we find that people behave time inconsistent older people have a stronger tendency to choose the lump sum than younger people when they are asked to predict today what to choose when they retire this effect is considerably stronger for participants that answer simple time preference questions inconsistently our findings suggest to think about precommitment devices for the annuitization decision in the retirement case already at the time when the defined benefit plan is started

can self control explain avoiding free money evidence from interest free student loans abstract this paper uses insights from behavioral economics to explain a particularly surprising borrowing phenomenon one in six undergraduate students offered interest free loans turns them down models of impulse control predict that students may optimally reject subsidized loans to avoid excessive consumption during school using the national postsecondary student aid study we investigate students take up decisions and identify a group of students for whom the loans create an especially tempting liquidity increase students who would receive the loan in cash are significantly more likely to turn it down suggesting that consumers choose to limit their liquidity in economically meaningful situations

saving puzzles and saving policies in the united states in the past two decades the widely reported personal saving rate in the united states has dropped from double digits to below zero first we attempt to account for the decline in the national income and product accounts nipa saving rate the macroeconomic literature suggests that 40 50 per cent of the drop since 1988 can be attributed to households spending stock market capital gains another 30 per cent is accounting transfers from personal saving into government and corporate saving because of the way pensions and capital gains taxes are treated in the nipa second while nipa saving measures are well suited to measuring the supply of new funds for investment and capital accumulation it is not clear that they should be the target of government saving policies finally we emphasize that the nipa saving rate is not useful in judging whether households are preparing for retirement or other contingencies many households have accumulated significant wealth primarily through retirement saving vehicles and capital gains even as the saving rate slid there remains a segment of the population who save little and whose behaviour appears untouched either by the stock market boom or the slide in personal saving we explore reasons and policy options for their puzzling low saving rate copyright 2001 oxford university press

informal commitments in planner doer games abstract this paper studies the role of informal commitments in dynamic choice under self control informal commitments in contrast to formal commitments are ad hoc personal rules of behavior that are not always observable moreover the effectiveness of these rules in constraining future choices is often dependent on the decision maker we model informal commitments using an extension of a standard planner doer model after thaler and shefrin 1981 taking a preference over menus i e formal commitments as an observable our main results show how to elicit and partially identify this model our model can explain evidence on self control behavior that cannot be represented by the gul and pesendorfer 2001 model of self control nor by any of its recent extensions

demand for rent to own contracts a behavioral economic explanation abstract rental purchase contracts for consumer durables often described as renting to own typically require total payments two to four times greater than retail prices under such conditions why do lower income consumers ever select this option within several low income samples we consider liquidity constraints time preferences and risk attitudes as possible explanations for this demand use of these services appears to be a risk averse response to the income and expense shocks faced by low income households and a financial management tool to address myopic time preferences

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

time inconsistent preferences and social security in this paper we examine the role of social security in an economy populated by overlapping generations of individuals with time inconsistent preferences who face mortality risk individual income risk and borrowing constraints we find that unfunded social security lowers the capital stock output and consumption for consumers with time consistent or time inconsistent preferences however it may raise or lower welfare depending on the strength of time inconsistency

temptation and commitment in the laboratory temptation and self control in intertemporal choice environments are receiving increasing attention in the theoretical economics literature nevertheless there remains a scarcity of empirical evidence from controlled environments informing behavior under repeated temptations this is unfortunate in light of the fact that in many natural environments the same temptation must be repeatedly resisted this paper fills that gap by reporting data from a novel laboratory study of economic decisions under repeat temptations subjects are repeatedly offered an option with instantaneous benefit that also entails a substantial reduction to overall earnings we show that this option is tempting in the sense that a substantial fraction of our subjects incur pecuniary costs to eliminate the choice and thus commit to not choosing the tempting alternative we compare the timing and price elasticity of these commitment decisions to predictions from existing theoretical models of decision under temptation our data are broadly consistent with theory with the notable exception that commitment often occurs with delay rather than at the first opportunity moreover the timing of commitment is significantly impacted by the cost of the commitment device the patterns we report have direct implications for economic theory and are a first step toward designing mechanisms that promote prudent economic decisions under temptation

agency relationships in family firms theory and evidence does owner management necessarily eliminate the agency costs of ownership drawing on agency literature and on the economic theory of the household we argue that private ownership and owner management expose privately held owner managed firms to agency threats ignored by jensen s and meckling s 1976 agency model private ownership and owner management not only reduce the effectiveness of external control mechanisms they also expose firms to a self control problem created by incentives that cause owners to take actions which harm themselves as well as those around them jensen 1994 p 43 thus shareholders have incentive to invest resources in curbing both managerialand owner opportunism we extend this thesis to the domain of the family firm after developing hypotheses which describe how family dynamics and specifically altruism exacerbate agency problems experienced by these privately held owner managed firms we use data obtained from a large scale survey of family businesses to field test our hypotheses and find evidence which suggests support for our proposed theory finally we discuss the implications of our theory for research on family and other types of privately held owner managed firms

impact of ownership on the international involvement of smes this paper analyses the relationship between the internationalisation strategies of smes and types of ownership different types of ownership affect firms and this in turn will influence the internationalisation strategy adopted using a sample of spanish smes our results show that internationalisation is negatively related to family ownership and positively related to corporate ownership we have also observed that the presence of a corporate blockholder in family firms encourages internationalisation these results support the idea that ownership type influences the decision to internationalise

hypothetical intertemporal consumption choices the paper extends and replicates part of the analysis by barsky juster kimball and shapiro 1997 which exploits hypothetical choices among different consumption streams to infer intertemporal substitution elasticities and rates of time preference we use a new and much larger dataset than barsky et al furthermore we estimate structural models of intertemporal choice while parameterizing the parameters of interest as a function of relevant individual characteristics we also consider lobehaviorallc extensions like habit formation models with habit formation appear to be superior to models with intertemporally additive preferences

smoking cessation a model of planned vs actual behavior for time inconsistent consumers we offer a simple model of intertemporal choice to characterize how planned versus actual behaviors evolve for time inconsistent smokers our results suggest that smokers participation and cessation decisions are governed by the interplay between three effects the cessation effect leads smokers to advance their plans to quit smoking whereas the procrastination effect leads them to consecutively revise their planned quitting age upwards consequently the duration of smoking is effectively governed by which one of these two effects is dominant finally for certain consumer segments a threshold effect causes an all or nothing type of extreme smoking behavior based on certain critical values of present biased preferences our results provide some preliminary evidence that both marketing efforts by tobacco firms and public policy initiatives can have a significant influence on smoking behavior in particular we find that reductions in the age at which individuals start smoking may not only vastly extend their duration of smoking but also convert potential never smokers into lifetime smokers finally we estimate a hazard model using survey data from over 800 smokers to provide evidence in support of our theoretical model

consumption self control by rationing purchase quantities of virtue and vice consumers attempts to control their unwanted consumption impulses influence many everyday purchases with broad implications for marketers pricing policies addressing theoreticians and practitioners alike this paper uses multiple empirical methods to show that consumers voluntarily and strategically ration their purchase quantities of goods that are likely to be consumed on impulse and that therefore may pose self control problems for example many regular smokers buy their cigarettes by the pack although they could easily afford to buy 10 pack cartons these smokers knowingly forgo sizable per unit savings from quantity discounts which they could realize if they bought cartons by rationing their purchase quantities they also self impose additional transactions costs on marginal consumption which makes excessive smoking overly difficult and costly such strategic self imposition of constraints is intuitively appealing yet theoretically problematic the marketing literature lacks operationalizations and empirical tests of such consumption self control strategies and of their managerial implications this paper provides experimental evidence of the operation of consumer self control and empirically illustrates its direct implications for the pricing of consumer goods moreover the paper develops a conceptual framework for the design of empirical tests of such self imposed constraints on consumption in consumer goods markets within matched pairs of products we distinguish relative virtue and vice goods whose preference ordering changes with whet her consumers evaluate immediate or delayed consumption consequences for example ignoring long term health effects many smokers prefer regular relative vice to light relative virtue cigarettes because they prefer the taste of the former however ignoring these short term taste differences the same smokers prefer light to regular cigarettes when they consider the long term health effects of smoking these preference orders can lead to dynamically inconsistent consumption choices by consumers whose tradeoffs between the immediate and delayed consequences of consumption depend on the time lag between purchase and consumption this creates a potential self control problem because these consumers will be tempted to over consume the vices they have in stock at home purchase quantity rationing helps them solve the self control problem by limiting their stock and hence their consumption opportunities such rationing implies that per purchase occasion vice consumers will be less likely than virtue consumers to buy larger quantities in response to unit price reductions such as quantity discounts we first test this prediction in two laboratory experiments we then examine the external validity of the results at the retail level with a field survey of quantity discounts and with a scanner data analysis of chain wide store level demand across a variety of different pairs of matched vice regular and virtue reduced fat calorie or caffeine etc product categories the analyses of these experimental field and scanner data provide strong convergent evidence of a characteristic crossover in demand schedules for relative vices and virtues for categories as diverse as among others potato chips chocolate chip cookies cream cheese beer soft drinks ice cream and frozen yogurt chewing gum coffee and beef andturkey bologna vice consumers demand increases less in response to price reductions than virtue consumers demand although their preferences are not generally weaker for vices than for virtues constraints on vice purchases are self imposed and strategic rather than driven by simple preferences we suggest that rationing their vice inventories at the point of purchase allows consumers to limit subsequent consumption as a result of purchase quantity rationing however vice buyers forgo savings from price reductions through quantity discounts effectively paying price premiums for the opportunity to engage in self control thus purchase quantity rationing vice consumers are relatively price in sensitive from a managerial and public policy perspective our findings should offer marketing practitioners in many consumer goods industries new opportunities to increase profits through segmentation and price discrimination based on consumer self control they can charge premium prices for small sizes of vices relative to the corresponding quantity discounts for virtues virtue consumers on the other hand will buy larger amounts even when quantity discounts are relatively shallow a key conceptual contribution of this paper lies in showing how marketing researchers can investigate a whole class of strategic self constraining consumer behaviors empirically moreover this research is the first to extend previous theoretical work on impulse control by empirically demonstrating its broader implications for marketing decision making

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

locus of control and savings abstract this paper analyzes the relationship between individuals locus of control and their savings behavior i e wealth accumulation savings rates and portfolio choices locus of control is a psychological concept that captures individuals beliefs about the causal relationship between their own behavior and life events we find that households with an internal reference person a main respondent who believes that he she can generally control relevant aspects of life save more in terms of levels and in some cases as a percentage of their permanent incomes although the locus of control gap in savings rates is largest among rich households the gap in wealth accumulation is particularly large for poor households finally our findings indicate that households with an internal reference person are in a better position to save in forms that are harder to access such as pension wealth than otherwise similar households with an external reference person

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

strategic implications of darwinian economics for selling efficiency and choice of integrated or independent sales forces most managers when confronted with a difficult strategic decision would like to know what is the prevailing practice in their industry prevailing practice interests managers in part because it may indicate which decisions are good even best the rationale is darwinian economics which proposes that competitive markets operate to force at least an approximation of optimal behavior because wrong decisions are extinguished by the market mechanism if so the bulk of survivors make good business decisions and their collective practice is worth knowing meaning it should be difficult to improve upon this paper tests whether prevailing practice represents good decisions the context is the decision whether to fill a sales district with a company integrated sales force or with outside agents independents the outcome of the choice is the ratio of sales to the cost of running the sales force i e selling efficiency a model is described which summarizes industry decisions and two propositions are developed proposition 1 a simple version states that efficiency declines as firms depart from the industry rule as to when they should integrate proposition 2 a contingent version states that efficiency declines as firms depart from the industry rule in unpredictable selling environments but that conforming to the rule has no impact in predictable environments the rationale is that firms learn the environment well enough to know when to depart from the rule in predictable settings but not otherwise the relationship between efficiency and conformity to prevailing practice is examined for 93 sales districts of 11 recognized electronic component manufacturers the results support proposition 2 the most efficient sales forces conform to prevailing practice and the least efficient deviate but only in uncertain environments in more certain environments conformity and efficiency are unrelated implications such as when it pays to be different and suggestions for future research are discussed

how many paychecks an example of a self imposed constraint i introduction the case of ulysses and the sirens is one of the most interesting puzzles for the model of rational behavior 1 ulysses knew enough about himself to know that he would not be able to control his behavior when under the spell of the sirens so he had himself bound to the mast had wax put into the ears of his crew and instructed them to completely disregard any gestures he might make it is reasonable to ask if ulysses knew enough to know that he would lose control when under the spell of the sirens why didn t he know enough to maintain control more generally if you are rational enough to know you are going to be irrational why can t you stop the irrationality apparently things are not so simple psychiatrist george ainslie 1975 1992 argues based upon a large body of experimental evidence in psychology that individuals have an inherent tendency to be myopic and this leads them to have to develop rules of behavior which limit options given the story of ulysses the process of imposing such constraints on oneself is sometimes called binding the christmas club is the traditional example of a self imposed constraint 2 the local credit union offers an account which has all of the attributes of the normal savings account and the added characteristic that the account holder cannot make any withdrawals until a specified date close to christmas given that the lack of flexibility inherent in the christmas club is combined with no compensating advantage of any sort e g higher interest rates standard analysis suggests the christmas club would have no takers but in fact there are many christmas club members 3 apparently a large number of individuals feel they cannot trust themselves to save money for christmas shopping in a normal savings account the christmas club gives them a way of tying their hands it is a self imposed constraint in this paper i examine behavior which might also be an example of a self imposed constraint at the college of william and mary a full time faculty member has the option of receiving her salary in eighteen equal payments over the nine month academic year or in twenty four equal payments over the entire year starting in september the twenty four month option has the look of a self imposed constraint 4 the faculty member who takes this option is foregoing interest earnings from a simple plan which deposits eighteen payments earns interest and finances the summer perhaps the faculty members who elect the twenty four payment option are like ulysses they know enough to know that they will not follow the plan they know enough to make a preference for the twenty four payment option is not necessarily evidence of a self imposed constraint taking eighteen payments squirreling away some of each payment and financing one s summer expenditures from what had accumulated during the academic year is a costly endeavor therefore a standard economic model based on transactions costs could also explain a preference for the twenty four payment option the purpose of this paper is to present a test of these two models ii theoretical analyses of the choice of the twenty four payment option a standard economic model the task at hand is to explain the demand for the twenty four payment option as compared to the eighteen payment option since the total salary is the same in both cases at any nonzero interest rate the present value of the eighteen payment option dominates the present value of the twenty four payment option this suggests that on a strict basis of economic rationality there would be no takers for the twenty four payment option at william and mary however over 67 percent of the faculty choose the twenty four payment option there is however a clear difficulty with simply comparing present values in this case such a comparison implicitly assumes that trips to the bank are costless a complete model should consider transactions costs

frames of reference and the quality of life asked to choose most people state confidently that they would rather be killed in an automobile accident than to survive a quadraplegic and so we are not surprised to learn that severely disabled people experience a period of devastating depression and disorientation in the wake of their accidents what we do not expect however are the speed and extent to which many of these victims accommodate to their new circumstances within a year s time many quadraplegics report the same mix of moods and emotions as able bodied people do there is also evidence that the blind the retarded and the malformed are no less happy than other people ads for the new york state lottery show participants fantasizing about how their lives would change if they won i d buy the company and fire my boss people who actually do win the lottery report the anticipated rush of euphoria in the weeks after their good fortune followup studies done after several years however indicate that these people are no happier indeed are in many ways less happy than before as a young man fresh out of college i served as a peace corps volunteer in rural nepal my one room house had no electricity no heat no indoor toilet no running water the local diet offered little variety and virtually no meat and yet at no time during my two year stay in nepal did i experience a sense of material deprivation on the contrary my monthly stipend of 40 was much more than most others in my village had and with it i experienced a feeling of prosperity that i have recaptured only in recent years these observations illustrate the critical role of context as a determinant of human satisfaction the neoclassical economic model of choice abstracts from context saying that utility depends only on the level of consumption consumption levels obviously are important and the neoclassical model performs reasonably well in many instances and yet its narrow focus misses something important to predict people s behavior to draw inferences about their well being or to make intelligent policy decisions we must not only know the relevant levels of consumption but also have an appropriate frame of reference within which to evaluate them

behavioral environmental economics promises and challenges environmental issues provide a rich ground for identifying the existence and consequences of human limitations in this paper we present a growing literature lying at the interface between behavioral and environmental economics this literature identifies alternative solutions to traditional economic instruments in environmental domains that often work imperfectly but it also faces a set of challenges including the difficulty of computing welfare effects and the identification of a robust environmental policy based on context dependent socio psychological effects we illustrate our critical discussion with two behavioral schemes that have been widely implemented green nudges and corporate environmental responsibility

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

psychology and savings policies many observers of the current economic scene are concerned about the low rate of personal saving in the united states one well known researcher laurence kotlikoff 1992 calls the situation a crisis he proposes that each american worker receive an annual statement from the social security administration with projected benefits upon retirement arguing that if each of us got this statement our attention would be caught and perhaps our psychology of saving which is in such urgent need of redress would really change p 107 i agree with the thrust of kotlikoff s recommendations and join him in applauding steps that will alter the general public s psychology of saving however as economists we need to recognize that the economic theory of saving is similarly in urgent need of redress if we are to understand why people are saving so little and are to make helpful recommendations as to how to get people to save more we have to incorporate more of the psychology of saving into our economic theories kotlikoff s policy proposal while a sensible one highlights the growing gap between theory and policy prescription in this domain if households are acting in accordance with the life cycle theory of saving then undersaving is impossible so why do they need to have their psychology redressed and how does this psychology fit into the model this example reflects an increasing frustration in the economics community about personal saving many observers have come to the conclusion that the low saving rate represents an important problem on two fronts macroeconomists worry that the low saving rate will produce too little investment and microeconomists worry that individuals particularly the baby boomers are not putting enough away to finance a satisfactory lifestyle in retirement these are serious concerns however the frustration comes from the realization that even if there was agreement that the saving rate needs to go up economic theory offers little help in constructing a solution in the standard life cycle framework the only policy variable is the after tax rate of return to saving yet it is well known that the theory does not specify the sign of the relationship between the saving rate and the interest rate raising the interest rate increases the returns to saving but decreases the amount of saving necessary to yield any given future consumption level furthermore empirical estimates offer little help most studies are unable to reject the hypothesis that the elasticity of personal saving with respect to the interest rate is zero clearly this is frustrating the theory only gives us one lever to use and we don t know whether to push or pull with this background i wish to supply what should be considered good news the theory is misspecified life cycle models of saving fail to describe actual household saving in three important ways this failure of the theory is good news because by incorporating some basic psychology we can enrich the theory and generate specific policy recommendations in this paper i will begin by characterizing the problems with the theory and then go on to discussing the implications of modifying the theory

hierarchical choice in economics abstract the paper examines the relevance for economic issues of choice which is not characterized by unlimited substitutability after showing that hierarchical choice is common in other social sciences like psychology the paper proceeds with an examination of such choice and of its different categories subsequently the implications for hierarchical choice for specific economic issues are analysed in particular there is discussion and literature review of demand theory engel curves the theory of the firm and social choice theory finally some suggestions for the application to other economic problems are considered

re evaluating the role of energy efficiency standards a behavioral economics approach abstract the economic models that prescribe pigovian taxation as the first best means of reducing energy related externalities are typically based on the neoclassical model of rational consumer choice yet consumer behavior in markets for energy using durables is generally thought to be far from efficient giving rise to the concept of the energy efficiency gap this paper presents a welfare analysis of energy policies that is based on a behavioral model of temptation and self control introduced by gul and pesendorfer 23 24 we find that in the presence of temptation i pigovian taxes alone do not yield a first best outcome ii when viewed as substitutes energy efficiency standards can dominate pigovian taxes and iii a policy combining standards with a pigovian tax can yield higher social welfare than a pigovian tax alone implying that the two instruments should be viewed as complements rather than substitutes

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

contraction with unpacking when unpacking leads to lower calorie budgets consumers set a lower consumption budget when they set individual calorie budgets for constituent categories e g breakfast lunch dinner and snacks categorical approach versus when they set a total budget overall approach this contraction effect of unpacking a judgment is driven by motivated reasoning consumers are motivated to reduce calorie consumption and this motive directs their cognitive elaboration for the budget decision to be on what to cut and how much to cut furthermore the categorical vs overall approach brings to mind more thoughts that are consistent with the motive to reduce consumption which then leads to a lower calorie budget consistent with this explanation the level of elaboration on reducing calorie intake especially on occasions where overconsumption is less salient mediates the contraction effect in addition the contraction effect is attenuated when the motive to reduce consumption is deactivated finally while the contraction effect occurs when consumers have a motive to reduce consumption the classic expansion effect of unpacking occurs when consumers are prompted to think about what to consume or are motivated to increase consumption the results for calorie budgeting are shown to have downstream consequences on actual food consumption

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

measuring self control problems we develop a survey instrument to measure self control problems in a sample of highly educated adults this measure relates in the manner that theory predicts to liquid wealth accumulation and personality measures yet while self control problems are typically seen as resulting in overconsumption and low wealth we identify a significant group who underconsume and thereby accumulate high levels of wealth in addition self control problems are smaller in scale for older than for younger respondents those who put money aside in retirement accounts may be delaying access to a point at which self control problems are no longer important jel d12 d14

competition as a savings incentive a field experiment at a homeless shelter abstract this paper describes a randomized field experiment testing the impact of a savings competition on the behavior of homeless individuals staying at a transitional shelter when monetary prizes were offered for achieving the highest saving rates within a particular month average savings increased by 80 a 30 increase in savings rate while income and attendance at case management meetings remained unchanged however repeating the competition in the following month had no effect because responsive savers selected out of the shelter after the first month in summary while a savings competition can increase savings in the short run its effect may be limited to the intensive margin and may diminish with repetition

health and labor market performance the case of diabetes technological innovation has reduced the effect of diabetes diabetic behavioral modification in the face and expectation of medical improvement should lead to improved labor market outcomes this article uses three cross sectional data sets from 1976 1989 and 1992 to document improvements in diabetic labor market performance women diabetics have significantly increased their labor force participation while male diabetics have slightly reduced their participation relative to nondiabetics

reassessing the government s discount rate policy in light of new theory and data in a world economy with a high degree of capital mobility abstract the paper reexamines the government s discount rate policy in the context of new evidence on international capital mobility the relationship between deficits and interest rates the relationship between consumer interest rates and the consumer s rate of time preference and intergenerational compensation it concludes that the approximate discount rate for government decisions will differ depending on the policy problem and that the government s borrowing rate is appropriate in some cases and in others the private rate should be used for long term policies the benefit cost rationale for discounting breaks down and must be reestablished on principles incorporating intergenerational equity

attitudes and allocations status cognitive dissonance and the manipulation of attitudes abstract economic studies of social status have typically focused on individuals engaging in relative comparisons based on certain characteristics e g consumption wealth without considering why these characteristics are deemed status worthy in this paper individuals choose a status earning characteristic in order to reduce mental discomfort dissonance as a result those individuals with the highest marginal utility from income are often the first to misconstrue or abandon these incentives in favor of alternate forms of seeking status the model provides an explanation for endogenous class formation and highlights the role of redistributive taxation in manipulating individuals attitudes towards status

the effect of partitions on controlling consumption abstract the authors demonstrate that partitioning an aggregate quantity of a resource e g food money into smaller units reduces the consumed quantity or the rate of consumption of that resource partitions draw attention to the consumption decision by introducing a small transaction cost that is they provide more decision making opportunities so that prudent consumers can control consumption thus people are better able to constrain consumption when resources associated with a desirable activity which they are trying to control are partitioned rather than when they are aggregated this effect of partitioning is demonstrated for the consumption of chocolates study 1 and gambles study 2 in study 3 process measures reveal that partitioning increases recall accuracy and decision times importantly the effect of partitioning diminishes when consumers are not trying to regulate consumption studies 1 and 3 finally study 4 explores how habituation may decrease the amount of attention that pa

when does money make money more important survey and experimental evidence the authors investigate how the amount and source of income affects the importance placed on money using a longitudinal analysis of the british household panel survey and evidence from two laboratory experiments they found that larger amounts of money received for labor were associated with individuals placing greater importance on money but this effect did not hold for money not related to work the longitudinal survey analysis demonstrated these differential effects of the source of income on money s importance while holding constant stable individual differences the experiments provide causal evidence that the source of income has an effect on the importance of money as well as on the effort expended to earn more money the authors results suggest that even as individual differences in the importance placed on money may affect peoples income depending on its source income can also affect the importance people place on money

an interregional analysis of price discrimination and domestic policy reform in the u s dairy sector the u s dairy sector has experienced several reforms in both government price support and classified pricing under state and federal milk marketing orders an interregional spatial market equilibrium model of the u s dairy sector is used to provide quantitative measures of the aggregate and regional impacts of alternative domestic deregulation scenarios the model simulates the allocation of farm milk used in the production of nine dairy products in a way consistent with milk component balances for milk fat protein and carbohydrate both within and across regions results suggest current policies induce substantive aggregate and regional distortions relative to an unregulated policy

self command in practice in policy and in a theory of rational choice an increasingly familiar occurrence for obstetricians is being asked by patients to withhold anesthesia during delivery the physician often proposes that a facemask be put beside the patient who may inhale nitrous oxide as she needs it but some determined patients ask that no such opportunity be provided if gas is available they will use it and they want not to be able to the request is interesting for decision theory and raises questions of ethics policy and physician responsibility even if the woman is merely making a mistake if she simply does not know how painful labor will be and how glad she will be even in retrospect if the pain is relieved but some women who make this request have had earlier deliveries during which they demanded anesthesia and received it they are acquainted with the pain they anticipate asking for relief and they want it withheld when they do they expect to regret afterwards any recourse to anesthesia this particular instance of attempted selfdenial has features that are special but many that are common the woman is so far as we know in good health physically and mentally she anticipates a transient period when her usual values and preferences will be suspended or inaccessible she has reasons for wanting to frustrate her own wishes at the critical time she needs cooperation she may ratify her choice afterward by expressing herself grateful that no anesthesia was offered even when requested there are ethical dilemmas and legal issues and there is conflict if say the husband disagrees with the physician in the delivery room about what his wife really wants

life cycle consumption of a harmful and addictive good david goldbaum this article demonstrates that the endogenous desire to quit smoking can result from a rational consumption path chosen at the time the consumer begins smoking this result is obtained without relying on hidden costs or unknown preferences a finite lived agent chooses a path of consumption of a harmful and addictive good to maximize present discounted utility the consumer chooses his consumption rate to account for the future health consequence of smoking and the withdrawal costs of quitting a consumer may choose to smoke even if it means a lowered utility level for the majority of the time spent smoking jel d91 c61 i12 i introduction some of what we consume for pleasure can be harmful economists assume that consumers take measure of the potential harm and balance it against the pleasure derived from consumption when both the pleasure and the harm occur at the time of consumption the decision is straightforward some goods though impose a cost borne at some future date requiring intertemporal planning these present a greater challenge to the consumer and to the economist trying to explain the consumer s behavior at times observed behavior implores us to question whether the consumer is properly weighing the costs and benefits in a manner that maximizes his or her utility theoretically for each item under consideration the rational consumer properly balances the lifetime benefits derived from the consumption against the lifetime costs some observed behavior seems to contradict this rational approach to consumption in particular it is common for people to begin smoking cigarettes during their youth only to endogenously make a decision to quit at a future date to integrate this behavior with rationality modelers have proposed hidden costs multiple selves changing preferences or other strategies that limit the decision making ability of the youth in all of these cases for some consumers the decision to smoke is a mistake made during youth that has to be reversed at some cost as a middle aged adult this article aims to demonstrate that a lifetime path of consumption in which a person consumes a harmful and addictive good while young and quits at some later date is a path that is perfectly consistent with rational behavior it is not necessary to assume that mid life quitters are displaying irrational or time inconsistent behavior if all information regarding a good s harmful properties is revealed some consumers will still choose a path that requires quitting mid life this paper primarily examines the consumption of cigarettes but also includes analysis of a nonaddictive unhealthy good both of these harmful goods provide the consumer with immediate pleasure but at the cost of decreasing life expectancy background becker and murphy 1988 bm introduced the concept of rational addiction the idea that addicts are forward looking rational consumers present consumption choices reflect not only current utility considerations and budget constraints but also incorporate the anticipated impact of present consumption on future utility and budget constraints bm examine the behavior response of addicts to exogenous shocks changes from a steady state including the desire to quit originate only from exogenous shocks such as a change in the relative price of the good or a revelation about the detrimental health consequences of the addictive good that alters the consumer s utility derived from consumption the model offers no mechanism by which smokers may choose to alter behavior endogenously in contrast to bm s smokers many of today s smokers appear to quit in absence of an external shock anyone who began smoking after 1966 has been subjected to the legislated health warnings appearing on cigarette packages since that time 1 antismoking messages in radio and television advertisements during the 1950s and 1960s also helped to make the health consequences of smoking common knowledge

dynamic inconsistency and self control a planner doer interpretation we show that gul and pesendorfer s econometrica 69 2001 1403 representation result for preferences with temptation and self control can be reexpressed in terms of a costly intrapersonal conflict between a planner and doer as in thaler and shefrin j political econ 89 1981 392 and psychologists standard view of self control problems

performing arts attendance an economic approach this paper examines to what extent art education prices and standard socio economic characteristics influence attendance at professional performing arts events theatre classical music opera ballet and dance it distinguishes the influence such variables have on whether a person participates or not from the effect that they have on the number of times a person decides to attend the introduction of art education and price variables is likely to reduce the omitted variable bias present in previous empirical studies and improve estimations art education is highly correlated with participation while it is not equally associated with frequency of attendance prices and geographical concentration are generally not correlated with participation however there are large differences among art forms and economic resources appear to be relevant in the case of classical music policy makers can use information on what results can be expected from policies aimed at reducing prices or increase art education in

does self control depletion affect risk attitudes abstract a core prediction of recent dual self models is that risk attitudes depend on self control while these models have received a lot of attention empirical evidence regarding their predictions is lacking we derive hypotheses from three prominent models for choices between risky monetary payoffs under regular and reduced self control we test the hypotheses in a lab experiment using a well established ego depletion task to reduce self control and measuring risk attitudes via finely graduated choice lists manipulation checks document the effectiveness of the depletion task we find no systematic evidence in favor of the theoretical predictions in particular depletion does not increase risk aversion

endogenous time horizon and behavioral poverty trap theory and evidence from mozambique abstract this paper provides a model where a long term planning horizon improves economic decisions but also increases the salience of anticipated future utility hence a gloomy future induces the agent to shorten her time horizon in order to reduce distress caused by the anticipation of poverty at the cost of worsening her realized future consumption resulting in a behavioral poverty trap where poverty and shortsightedness reinforce each other the paper also provides primary empirical evidence of the endogenous determination of time horizon and of the existence of a behavioral poverty trap using a randomized controlled trial in mozambique that provided agro input subsidies and a matched savings program i show that improvement in economic prospects resulted in a significant increase in the planning horizon of the poor beneficiaries moreover the increase in horizon significantly predicts asset accumulation of beneficiaries during the two years following the intervention

self control financial literacy the co holding puzzle we use uk survey data to analyze the puzzling co existence of high cost revolving consumer credit alongside low yield liquid savings in household balance sheets which we name the co holding puzzle approximately 12 of households in our sample co hold on average 3800 of revolving consumer credit on which they incur interest charges even though they could immediately pay down all this debt using their liquid assets co holders are typically more financially literate with above average income and education in most estimates co holding is also associated with impulsive spending behavior on the part of the household our results provide empirical support to theoretical models in which households co hold as a means of managing self control problems

what accounts for the variation in retirement wealth among u s households even among households with similar socioeconomic characteristics saving and wealth vary considerably life cycle models attribute this variation to differences in time preference rates risk tolerance exposure to uncertainty relative tastes for work and leisure at advanced ages and income replacement rates these factors have testable implications concerning the relation between accumulated wealth and the shape of the consumption profile using the panel study of income dynamics and the consumer expenditure survey we find little support for these implications the data are instead consistent with rule of thumb mental accounting or hyperbolic discounting theories of wealth accumulation jel di d91 e21

if homo economicus could choose his own utility function would he want one with a conscience reply in my model of the evolution of honesty 1 i assumed the existence of a signal a blush perhaps extreme values of which served to identify some individuals as being honest with certainty joseph harrington notes that without this assumption honest individuals have difficulty invading a population initially dominated by defectors for readers who do not wish to work through the algebra in his comment the argument is easily summarized in nontechnical terms suppose two honest mutants a and b arrive in an uncountably large population consisting entirely of dishonest persons and suppose that the probability that an honest person exhibits an intense blush is say 0 999 while the corresponding probability for everyone else is only 0 001 when a sees an intense blush on the face of b what will then be his estimate of the probability that b is honest assuming that a knows the laws of elementary probability and corrects for the base rate of honest persons in the population it will be zero when virtually everyone in the population is dishonest even a person with an intense blush will be pegged as dishonest provided that even the smallest fraction of dishonest persons also shows an intense blush with

optimal investment choice for developing countries rational theory and rational decision making abstract this paper analyzes a key feature of the conceptual process that governments use for making major investment choices in the developing countries both through their direct investment activities and through the special incentives e g credit foreign exchanage and tax subsidies they provide governments typically play a large role in the allocation of investment resources in ldc s consequently the public investment choice process has significant effects on the efficiency of capital formation and on economic growth in developing countries although the feature of the investment choice process on which we focus has important theoretical and practical implications it has so far received little analytical attention

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

do workers prefer increasing wage profiles we present survey data challenging the assumption implicit in analyses of labor supply that all else being equal workers prefer declining over increasing wage profiles we test several explanations for our results including that a there is something special about wages e g their association with productivity as opposed to other types of payments that induces the preference for increasing wages b utility depends not only on absolute levels of consumption but also on changes in consumption over time and c respondents who prefer increasing wage profiles are irrational and would change their behavior if the rationale for preferring declining wages were explained

on intertemporal selfishness how the perceived instability of identity underlies impatient consumption how does the anticipated connectedness between one s current and future identity help explain impatience in intertemporal preferences the less consumers are closely connected psychologically to their future selves the less willing they will be to forgo immediate benefits in order to ensure larger deferred benefits to be received by that future self when consumers measured or manipulated sense of continuity with their future selves is lower they accept smaller sooner rewards wait less in order to save money on a purchase require a larger premium to delay receiving a gift card and have lower long term discount rates

incorporating biometric data in models of consumer choice the use of neuro physiological data in models of consumer choice is gaining popularity this article presents some of the benefits of using psycho physiological data in analyzing consumer valuation

consume now or later time inconsistency collective choice and revealed preference this paper develops a revealed preference methodology for exploring whether time inconsistencies in household choice are the product of nonstationarities at the individual level or the result of individual heterogeneity and renegotiation within the collective unit an empirical application to household level microdata highlights that an explicit recognition of the collective nature of choice allows the vast majority of household behaviour to be rationalised by theory that assumes preference stationarity at the individual level for our particular short panel data set simply permitting limited intrahousehold heterogeneity in time preferences allows the choices of 98 4 of the sample to be rationalised by a model that assumes exponential discounting at the individual level we also find that couples characterized by lower divergence in spousal discount rates are older more likely to have children and wealthier which we take as indications of experiencing higher match quality

seize the day or save the world the importance of ethical claims and product nature congruity consumers have shown increasing interest in products that reflect social and environmental concerns so called sustainable products although consumers typically view sustainability positively the ethical attributes of products do not always drive their preferences which implies a trade off between ethical attributes and other valued attributes in the current research we examine how consumers implicitly judge products and services that are more or less congruent with social and environmental concerns and how incongruity between ethical claims and a product s nature may influence consumers to behave responsibly the results from two experimental studies show that increasing the strength of ethical claims impairs sophisticated products evaluation but enhances simple products evaluation additionally the findings reveal that the strength of ethicality on sophisticated products may impair perceptions of product enjoyment to a point at which products are evaluated more favorably when less ethical claims are used to promote them for managers the results highlight an important business consideration as they reveal the circumstances under which it is worth emphasizing the strength of the sustainability appeal of products or services results show that not all consumers are willing to sacrifice taste or quality in their leisure time preferring to seize the day rather than saving the world

strategic ignorance as a self disciplining device we analyse the decision of an agent with time inconsistent preferences to consume a good that exerts an externality on future welfare the extent of the externality is initially unknown but may be learned via a costless sampling procedure we show that when the agent cannot commit to future consumption and learning decisions incomplete learning may occur on a markov perfect equilibrium path of the resulting intra personal game in such a case each agent s incarnation stops learning for some values of the posterior distribution of beliefs and acts under self restricted information this conduct is interpreted as strategic ignorance all equilibria featuring this property strictly pareto dominate the complete learning equilibrium for any posterior distribution of beliefs

psychological characteristics and household savings behavior the importance of accounting for latent heterogeneity abstract we employ a finite mixture model with maximum likelihood ml estimation to analyze latent heterogeneity in the relationship between psychological characteristics and household savings behavior in a one step ml estimation approach we estimate a class membership model and a behavioral model of the classes jointly adopting this approach enables us to simultaneously assess how socio demographic characteristics affect class membership probabilities and estimate class specific regression coefficients to test whether psychological characteristics predict savings behavior differently across latent classes we apply this approach to a representative sample of uk households n 3382 and identify two different latent classes striving versus established households we find that the relationship between psychological characteristics and savings behavior differs across these two classes demonstrating the importance of accounting for latent heterogeneity when studying the drivers of savings behavior our results have implications for policymakers attempting to improve household savings behavior

your loss is my gain a recruitment experiment with framed incentives empirically labor contracts that financially penalize failure induce higher effort provision than economically identical contracts presented as paying a bonus for success an effect attributed to loss aversion this is puzzling as penalties are infrequently used in practice the most obvious explanation is selection loss averse agents are unwilling to accept such contracts i formalize this intuition then run an experiment to test it surprisingly i find that workers were 25 percent more likely to accept penalty contracts with no evidence of adverse or advantageous selection consistent with the existing literature penalty contracts also increased performance on the job by 0 2 standard deviations i outline extensions to the basic theory that are consistent with the main results but argue that more research is needed on the long term effects of penalty contracts if we want to understand why firms seem unwilling to use them

tying life insurance and savings decisions a multiperiod expected utility approach abstract many whole life insurance contracts provide in addition to protection in case of death of the insured also a savings element the main purpose of this article is to provide an economic rationale for this practice two alternative models are offered in both models it is assumed that there is an asymmetry of information between the insurers and insureds where the know better their probability of death and hence adverse selection may cause a market failure it is shown that by offering several deliberately designed contracts tying savings and insurance the insurers can induce the insureds to self select that is insureds with higher probability of death will voluntarily choose different contracts than those with a lower probability of death and hence will reveal their probability of death to the insurers the problem of adverse selection is thus overcome in the first model contracts differ in the amount of insurance they specify and the amount of savings tied with insurance in the second model a multiperiod actually two period contract and a single period contract are offered the multiperiod contract specifies a savings element which will be received by the insured if he or she lives at the end of the second period it is shown that by the right choice of the return on the savings part insureds with lower probabilities of death will choose the multiperiod contract whereas insureds with higher probability of death will prefer two successive single period contracts again self selection is achieved these two models show that tie in arrangements of savings and insurance may help overcome the adverse selection problem and hence an economic rationale is provided for their existence the paper also examines the demand for life insurance and savings the sensitivity of the demand for these products to variations in key parameters is analyzed the differences between the sensitivity analyses results obtained when insurance and savings decisions are made separately and those obtained when these decisions are simultaneosly made are highlighted and explained