Temptation, horizontal differentiation and monopoly pricing

We study the implications for pricing strategies and product offerings of consumers’ temptation when the differentiation of the product is horizontal. With horizontal differentiation, the temptation state is represented by a change in the consumers’ ideal product on the Hotelling line, so that consumers have two (possibly distinct) ideal products: one when committed and another when tempted. The firm faces the following trade-off: for the consumer who diverge the most between the ideal product with temptation and commitment, if the firm positions a product close to the consumer’s temptation ideal product, it increases the consumer’s surplus when tempted but decreases surplus with commitment, which lowers the consumer’s incentive to participate. This paper shows that, because of this trade-off, the firm may exclude products that are too close to the temptation preferences in the optimal menu. Moreover, it is shown that product diversity and firm’s profits decrease with the probability of temptation and with the consumers’ awareness of their dynamic inconsistenc

Make it challenging : motivation through goal setting

We study a principal agent model where agents derive a sense of pride when accomplishing production goals. As in classical models, the principal offers a pay-per-performance wage to the agent, determining the agent’s extrinsic incentives. However, in our setting, the principal does also want to set goals that affect the agents’ intrinsic motivation to work. Agents differ in their personal standard which determines what becomes challenging and rewarding to them, and hence the intensity of their intrinsic motivation to achieve goals. We show that, at the optimal contract, the agents’ production, as well as the goals set by the principal, increase with the agents’ personal standards. Thus, although goal setting is payoff irrelevant, since it does not directly affect agents’ wage, it increases agents’ achievement and hence the principal’s profits. Moreover, we show that a mediocre standard agent could end up being the most satisfied on

Essays on behavioral economics

This dissertation seeks to contribute to the literature on behavioral industrial organization by incorporating important psychological traits of human behavior into classic economic models. We analyze how these psychological traits can explain market observables, in a way consistent with available empirical evidence. The psychology literature has identi ed two important psychological traits that, when interpreted in economics settings, may contribute to explaining the behavior of economic agents. On the one hand, agents (workers) have a sense of self-achievement, caring about their effort being acknowledged independently of whether it is compensated for. On the other hand, agents (consumers) may suffer from temptation, being tempted to buy products they would like to commit ex-ante not to choose. In both cases, the behavior of the agents (consumers or workers) is modifi ed because options that do not result in a monetary pay-o¤, either because the options are not chosen or because the payoffs are implicit, end up mattering to the agents. Exploring the implications of such payoffs require that we depart from standard economic models as these predict that only the offers that the agent may choose matter. The fi rst chapter of this dissertation studies, within a principal-agent model, the properties of the optimal contract when workers have a sense of self-achievement. The second and third chapters study a seller's optimal pricing products when selling horizontally differentiated products to consumers who su¤er from temptatio

Menu-Dependent Food Choices and Food Waste

We use a combination of randomized field experiments and online surveys to test how the menu design affects food choices and food waste. In our field experiment, participants face one of two menus: a narrow menu that only displays a small portion of food, or a broad menu that also contains bigger portions. While all options are equally available in both menus, they differ in how easy and fast the different choices can be made. Our results show that, compared to the broad menu, participants in the narrow menu ordered smaller portions of food. Importantly, food intake was similar across conditions, leading to significant food waste reduction under the narrow menu. Our online survey suggest that these results are consistent with a combination of anchoring and menu-dependent self-control theories. We discuss the implication of our results to menu design in real world settings

The Influence of Food Recommendations: Evidence from a Randomized Field Experiment

We report results from a randomized field experiment conducted at two food festivals. Our primary aim is to assess the impact of two types of recommendations commonly observed in food settings: most popular and chef’s choice. Subjects select a cupcake from a binary menu. The two options, offered by the same bakery, are the best seller in the bakery and the baker’s recommended cupcake. Our treatments manipulate whether the recommendation is disclosed in tandem with the cupcakes in the menu. We find that the most popular is the only recommendation that statistically significantly increased consumers’ demand relative to a baseline without recommendations. Furthermore, we find that this effect only holds for subjects from outside the local region. Our results are consistent with laboratory studies indicating information on peers’ choices is a powerful influence on consumers’ decisions, especially in the absence of prior knowledge

Goal Setting in the Principal-Agent Model: Weak Incentives for Strong Performance

We study a principal-agent framework in which principals can assign wage-irrelevant goals to agents. We find evidence that, when given the possibility to set wage-irrelevant goals, principals select incentive contracts for which pay is less responsive to agents' performance. We show that average performance of agents is higher in the presence of goal setting than in its absence despite weaker incentives. We develop a principal-agent model with reference-dependent utility that illustrates how labor contracts combining weak monetary incentives and wage-irrelevant goals can be optimal. It follows that recognizing the pervasive use of non-monetary incentives in the workplace may help account for previous empirical findings suggesting that firms rely on unexpectedly weak monetary incentives

The Effect of Wage Proposals on Efficiency and Income Distribution☆

Pre-play non-binding communication in organizations is prevalent. We study the implications of pre-play, private and public, wage proposals in labor markets. To that end, we develop a theoretical model from which we derive certain hypothesis that we test through a laboratory experiment. In the baseline, that depicts a typical labor market interaction, the employer makes a wage offer to the worker who may then accept or reject it. In subsequent treatments, workers, moving first, make private, non-binding, wage proposals to the employer. In a following treatment, the proposals are made public. Our findings suggest that both private and public wage proposals promote higher wages, efficiency, and income equality. Public information on wage proposals benefits firms more than workers while, workers benefit more under private proposals where income inequality is the lowest. We find some support in our data on workers conforming to their co-workers’ wage proposals when these are public. Finally, the gender gap observed in the baseline on acceptance rates and workers’ income vanishes when proposals are present

Making It Public: The Effect of (Private and Public) Wage Proposals on Efficiency and Income Distribution

The implications of (public or private) pre-play communication and information revelation in a labour relationship is not well understood. We address these implications theoretically and experimentally. In our baseline experiments, the employer offers a wage to the worker who may then accept or reject it. In the public and private treatment, workers, moving first, make a non-binding private or public wage proposal. Our theoretical model assumes that wage proposals convey information about a worker’s minimum acceptable wage and are misreported with a certain probability. It predicts that, on average, wage proposals lead to higher wage offers and acceptance rates, with the highest wages under private proposals. While both, public and private, proposals increase efficiency over the baseline, private proposals generate higher worker incomes. Broad support for the theoretical predictions is found in the laboratory experiments. Our work has important implications for recent policies promoting public information on wage negotiations. We find that while wage proposals promote higher wages, efficiency, and income equality, public information on wage negotiations is likely to benefit firms more than workers

Temptation, Horizontal Differentiation And Monopoly Pricing

We study the implications for monopoly pricing strategies and product diversity of consumers’ temptation when the differentiation of the product is horizontal. Consumers have an ex-ante ideal product (“commitment preferences”), but they and the monopolist are aware that consumers may fall prey to “temptation preferences” ex-post with some probability. Our results indicate that when consumers are aware of their dynamic change in preferences, the firm cannot take advantage of consumers’ temptation but instead, in order to attract them into the store, the firm must compensate ex-ante consumers for the possibility of yielding to temptation once inside the store. As a result, this paper shows that the firm narrows the variety of products, not offering those products close to temptation preferences. Moreover, it is shown that product prices and firm’s profits decrease with the probability of temptation and with the consumers’ awareness of their dynamic inconsistency