OTHER PUBLISHED AND FORTHCOMING PAPERS
Revealed Mistakes and Revealed Preferences
(with Matthew Rabin), in The Foundations of Positive and Normative Economics, Andrew Caplin and Andrew Schotter (editors), Oxford University Press (2008), Chapter 8, pp. 193-209.
Mistakes in Choice-Based Welfare Analysis
(with Matthew Rabin), American Economic Review (2007), 97(2), pp. 477-481. Revised January 2007.
On the Feasibility of Market Solutions to Self-Control ProblemsAbstract:
I consider behavior and welfare in competitive markets supplying harmful or beneficial goods
when consumers at each moment in time prefer immediate gratification more than they would
themselves approve. In a spot market and without commitment to her consumption level in
advance, a decisionmaker overconsumes harmful goods and underconsumes beneficial goods from
her own point of view. The optimal level of consumption can be achieved by adjusting prices
in a way that forces a consumer to fully internalize the future consequences of consumption.
Calibrations in the case of tobacco and exercise indicate that the optimal interventions can
be very large. I examine the extent to which market forces can provide such “self-control”
interventions when firms and consumers can agree on price schedules ex ante. If consumers
are bound to the firm whose offer they accept and price schedules are restricted to two-part
tariffs, consumption is much closer to optimal than in a spot market. But if consumers cannot
be prevented from purchasing from other firms ex post, the consumption of harmful goods is
as if only a spot market was available. And if firms can engage in non-linear pricing, perfectly
sophisticated consumers consume optimally in equilibrium, but individuals with an arbitrarily
small amount of overoptimism regarding their self-control problem consume as if they were
buying on the spot market. Hence, government intervention may typically be necessary to
correct self-control problems.
Swedish Economic Policy Review (2005), 12(2), pp. 71-94.
