Time Inconsistency, Sophistication, and Commitment An Experimental Study

We experimentally study the relationship between time inconsistency, sophistication about time inconsistency, and self-commitment. Previous research has interpreted demand for commitment devices as evidence for the sophistication of a time-inconsistent decision-maker. In our laboratory experiment, we attempt to measure sophistication directly by way of a cognitive test. We then test the hypothesis that people who are both time-inconsistent and show high cognitive capacity take up commitment devices when offered in the strategic game between their current and their future self. For experimental laboratory commitment choices, we cannot detect a moderating effect of cognition on commitment demand of time-inconsistent subjects. However, we find that the existence of time-inconsistent preferences and sophistication (proxied by cognitive performance) can predict the demand for savings commitment in our hypothetical survey vignette question.Series: Department of Strategy and Innovation Working Paper Serie

Commitment Contracts

We review the theoretical and empirical literature on commitment devices.A commitment device is any arrangement, entered into by an individual, with the aim of making it easier to fulfill his or her own future plans. We argue that there is growing empirical evidence supporting the proposition that people demand commitment devices and that these devices can change behavior. We highlight the importance of further research exploring soft commitment – those involving only psychological costs – and the welfare consequences of hard commitments – those involving actual costs – especially in the presence of bounded rationality.consumer/household economics, institutional and behavioral economics

Measuring time preferences

We review research that measures time preferences—i.e., preferences over intertemporal tradeoffs. We distinguish between studies using financial flows, which we call “money earlier or later” (MEL) decisions and studies that use time-dated consumption/effort. Under different structural models, we show how to translate what MEL experiments directly measure (required rates of return for financial flows) into a discount function over utils. We summarize empirical regularities found in MEL studies and the predictive power of those studies. We explain why MEL choices are driven in part by some factors that are distinct from underlying time preferences.National Institutes of Health (NIA R01AG021650 and P01AG005842) and the Pershing Square Fund for Research in the Foundations of Human Behavior

Field and Online Experiments on Procrastination and Willpower

Self-control problems have recently received considerable attention from economic theorists. We conducted two studies to test the benefits of externally imposed deadlines and how willpower depletion affects behavior, providing some of the first data in these areas. Each study involved a behavioral intervention designed to affect performance. We find that for a lengthy task, regular deadlines neither reduce procrastination nor increase completion rates. Second, a willpower-depleting task reduces initial effort but increases overall task-completion rates. Our results help to inform ongoing efforts to understand and model procrastination, willpower and commitment mechanisms.Experiment, Behavioral Interventions, Procrastination, Willpower

Rising indebtedness and temptation: a welfare analysis

Is the observed large increase in consumer indebtedness since 1970 beneficial for U.S. consumers? This paper quantitatively investigates the macroeconomic and welfare implications of relaxing borrowing constraints using a model with preferences featuring temptation and self-control. The model can capture two contrasting views: the positive view, which links increased indebtedness to financial innovation and thus better consumption smoothing, and the negative view, which is associated with consumers' over-borrowing. The author finds that the latter is sizable: the calibrated model implies a social welfare loss equivalent to a 0.4 percent decrease in per-period consumption from the relaxed borrowing constraint consistent with the observed increase in indebtedness. The welfare implication is strikingly different from the standard model without temptation, which implies a welfare gain of 0.7 percent, even though the two models are observationally similar. Naturally, the optimal level of the borrowing limit is significantly tighter according to the temptation model, as a tighter borrowing limit helps consumers by preventing over-borrowing.Equilibrium (Economics)

Information processing with recursive utility: some intriguing results

We study information processing in a simple endowment economy where the mean consumption growth rate are governed by a hidden state variable and agents have recursive preferences. We show that for typical parameter values, there is a strong incentive to commit to ignoring future information on the state of the economy, but that such commitment raises time-inconsistency problems. We estimate the model on postwar US data and find that the representative consumer can achieve a utility gain equivalent to a 20% increase in lifetime consumption simply by not paying attention to the state of the economy.Recursive preferences, Epstein-Zin preferences, Uncertainty aversion,Information processing, Time inconsistency

Metatheory and Friendly Competition in Theory Growth: The Case of Power Processes in Bargaining

[Excerpt] This paper analyzes the theoretical development taking place in a program of research on power processes in bargaining (see Bacharach and Lawler 1976, 1980, 1981a, 1981b; Lawler and Bacharach 1976, 1979, 1987; Lawler, Ford, and Blegen 1988; Lawler and Yoon 1990; Lawler 1986, 1992). The theoretical program takes as its starting point a situation where individuals, groups, organizations, or even societies with conflicting interests voluntarily enter into explicit bargaining. Explicit (as opposed to tacit) bargaining assumes the mutual acknowledgment of negotiations, conflicting issues along which compromise is possible, and open lines of communication through which parties can exchange offers and counteroffers in an attempt to resolve the issues that divide them (Schelling 1960; Bacharach and Lawler 1980; Boyle and Lawler 1991). The scope of this theoretical research program assumes further that the parties have a power capability, that they use this power tactically in an effort to achieve desired outcomes, and that they strive for a favorable position during the bargaining process

Game Theory and Poe's Detective Stories and Life

Both Poe and Dupin, the detective character created by Poe, think like game theorists. The goal of this paper is to prove this conjecture. First, we show that each one of the three Dupin stories is filled with ratiocination that can be modeled according to game theory. Second, we briefly elaborate on the bargaining game that is lurking beneath the Poe’s whole trilogy. Third, we show that two very important decisions of Poe - as a young man, he left his foster father’s home; as a forty-year-old man, he took and published a temperance oath - are consistent with game-theoretic behavior.