PEER-REVIEWED PUBLICATIONS





Reference-Dependent Consumption PlansAbstract:

We develop a dynamic model in which utility depends on consumption as well as recent changes in beliefs about present and future consumption, and bad news is more painful than good news is pleasant. We assume a person's beliefs must be rational in that she must find her own plan for state-contingent behavior credible: given the expectations generated by the plan, in each period it maximizes discounted expected utility taking into account that continuation plans must also be consistent with rationality. Applying our model to the acquisition of decision-irrelevant information, we show that to avoid fluctuations in beliefs, a person prefers to receive information clumped together rather than separately. Our theory also predicts reference-dependent attitudes toward current changes in wealth -- even if wealth is exclusively for future consumption and there is substantial uncertainty about future income -- because such changes constitute news about the distribution of future consumption. We also apply our theory to a two-period consumption-savings problem, where many of our results follow from the assumption that surprises in imminent consumption resonate more than surprises in future consumption. Since raising current consumption above the planned level is a pleasant surprise, a decisionmaker might overconsume early relative to the optimal committed plan. While the aversion to losses from lowering planned future consumption can deter overconsumption when plans are deterministic, uncertain plans mitigate this countervailing force, so overconsumption is exacerbated by current uncertainty. Because a surprise increase in lifetime wealth is most pleasant, and a surprise decrease most unpleasant, if consumed immediately, a person responds asymmetrically to surprises. And since higher consumption reduces the sensation of loss from lower-than-expected consumption whenever the consumption utility function is concave, our model unambiguously predicts first-order precautionary savings in response to anticipated uncertainty about future income.

(with Matthew Rabin), forthcoming, American Economic Review. Revised May 2008.





Choices, Situations, and Happiness

(with Matthew Rabin), forthcoming, Journal of Public Economics. Revised March 2008.





Competition and Price Variation when Consumers are Loss AverseAbstract:

We introduce consumer loss aversion into the Salop (1979) model of price competition with differentiated products. A consumer evaluates the price of and her satisfaction with the acquired product relative to her recent expectations regarding the same variables, and dislikes losses more than she likes same-sized gains. Consumers' sensitivity to losses in money increases the price responsiveness of demand—and hence the intensity of competition—at higher relative to lower market prices, reducing or eliminating price variation both within and between products. For any joint distribution of firms' marginal costs, an equilibrium in which all firms always charge the same, "focal," price exists if and only if no two possible cost realizations differ by more than a constant. If firms' (possibly differently distributed) idiosyncratic cost shocks have overlapping supports and are distributed with sufficiently high density, any equilibrium is focal. When firms face common stochastic costs, in any symmetric equilibrium the markup is strictly decreasing in cost. Because a change in the price responsiveness of demand affects competition more when margins are high, these tendencies are stronger in less competitive industries. Finally, because the loss in product satisfaction she would suffer makes a consumer difficult to attract from a competitor, loss aversion decreases competition and increases prices.

(with Paul Heidhues), forthcoming, American Economic Review. Revised March 2008.





Drive and TalentAbstract:

We analyze ways in which heterogeneity in responsiveness to incentives (“drive”) affects employees’ incentives and firms’ incentive systems in a career concerns model. On the one hand, since more driven agents work harder in response to existing incentives than less driven ones—and therefore pay is increasing in perceived drive—there is a motive to increase effort to signal high drive. These “drive-signaling incentives” are strongest with intermediate levels of existing incentives. On the other hand, because past output of a more driven agent will seem to the principal to reflect lower ability, there is an incentive to decrease effort to signal low drive. The former effect dominates early in the career, and the latter effect dominates towards the end. To maximize incentives, the principal wants to observe a noisy measure of the agent’s effort—such as the number of hours he works—early but not late in his career.

(with Wei Li), Journal of the European Economic Association (2008), 6(1), pp. 210-236.





Reference-Dependent Risk AttitudesAbstract:

We use Kõszegi and Rabin’s (2006) model of reference-dependent utility, and an extension of it that applies to decisions with delayed consequences, to study preferences over monetary risk. Because our theory equates the reference point with recent probabilistic beliefs about outcomes, it predicts specific ways in which the environment influences attitudes toward modest-scale risk. It replicates “classical” prospect theory—including the prediction of distaste for insuring losses—when exposure to risk is a surprise, but implies first-order risk aversion when a risk, and the possibility of insuring it, are anticipated. A prior expectation to take on risk decreases aversion to both the anticipated and additional risk. For large-scale risk, the model allows for standard “consumption utility” to dominate reference- dependent “gain-loss utility,” generating nearly identical risk aversion across situations.

(with Matthew Rabin), American Economic Review (2007), 97(4), pp. 1047-1073. [Lead article.]





A Model of Reference-Dependent PreferencesAbstract:

We develop a model of reference-dependent preferences and loss aversion where “gain–loss utility” is derived from standard “consumption utility” and the reference point is determined endogenously by the economic environment. We assume that a person’s reference point is her rational expectations held in the recent past about outcomes, which are determined in a personal equilibrium by the requirement that they must be consistent with optimal behavior given expectations. In deterministic environments, choices maximize consumption utility, but gain–loss utility influences behavior when there is uncertainty. Applying the model to consumer behavior, we show that willingness to pay for a good is increasing in the expected probability of purchase and in the expected prices conditional on purchase. In within-day labor-supply decisions, a worker is less likely to continue work if income earned thus far is unexpectedly high, but more likely to show up as well as continue work if expected income is high.

(with Matthew Rabin), Quarterly Journal of Economics (2006), 121(4), pp. 1133-1166. [Lead article.]





Emotional AgencyAbstract:

This paper models interactions between a party with anticipatory emotions and a party who responds strategically to those emotions, a situation that is common in many health, political, employment, and personal settings. An “agent” has information with both decision-making value and emotional implications for an uninformed “principal” whose utility she wants to maximize. If she cannot directly reveal her information, to increase the principal’s anticipatory utility she distorts instrumental decisions toward the action associated with good news. But because anticipatory utility derives from beliefs about instrumental outcomes, undistorted actions would yield higher ex ante total and anticipatory utility. If the agent can certifiably convey her information, she does so for good news, but unless this leads the principal to make a very costly mistake, to shelter his feelings she pretends to be uninformed when the news is bad.

Quarterly Journal of Economics (2006), 121(1), pp. 121-156





Ego Utility, Overconfidence, and Task ChoiceAbstract:

This paper models behavior when a decision maker cares about and manages her self-image. In addition to having preferences over material outcomes, the agent derives “ego utility” from positive views about her ability to do well in a skill-sensitive, “ambitious,” task. Although she uses Bayes’ rule to update beliefs, she tends to become overconfident regarding which task is appropriate for her. If tasks are equally informative about ability, her task choice is also overconfident. If the ambitious task is more informative about ability, she might initially display underconfidence in behavior, and, if she is disappointed by her performance, later become too ambitious. People with ego utility prefer to acquire free information in smaller pieces. Applications to employee motivation and other economic settings are discussed.

Journal of the European Economic Association (2006), 4(4), pp. 673-707. [Lead article, winner of the 2008 Hicks-Tinbergen Medal for the best paper published in the Journal of the European Economic Association in the years 2006/2007.]





Tax Incidence when Individuals are Time-Inconsistent: The Case of Cigarette Excise TaxesAbstract:

One of the most cogent criticisms of excise taxes is their regressivity, with lower income groups spending a much larger share of their income on goods such as cigarettes than do higher income groups. We argue that traditional quantity-based measures of incidence are only appropriate under a very restrictive ‘‘time-consistent’’ model of consumption of sin goods. A model that is much more consistent with existing evidence on smoking decisions is a time-inconsistent formulation where excise taxes on cigarettes serve a self-control function that is valued by smokers who would like to quit but cannot. This self-control function benefits lower income groups more, since they have a significantly higher price sensitivity of smoking. Calibrations show that, as a result, cigarette taxes are much less regressive than previously assumed, and are even progressive for a wide variety of parameter values.

(with Jonathan Gruber); Journal of Public Economics (2004), 88(9-10), 1959-1987





Health Anxiety and Patient BehaviorAbstract:

Economic models of patient decision-making emphasize the costs of getting medical attention and the improved physical health that results from it. This note builds a model of patient decision-making when fears or anxiety about the future—captured as beliefs about next period’s state of health— also enter the patient’s utility function. Anxiety can lead the patient to avoid doctor’s visits or other easily available information about her health. However, this avoidance cannot take any form: she will never avoid the doctor with small problems, and under regularity conditions she will never go to a bad doctor to limit the information received.

Journal of Health Economics (2003), 22(6), pp. 1073-1084





Quasi-Hyperbolic Discounting and RetirementAbstract:

Some people have self-control problems regularly. This paper adds endogenous retirement to Laibson’s quasi-hyperbolic discounting savings model [Quarterly Journal of Economics 112 (1997) 443–477]. Earlier selves think that the deciding self tends to retire too early and may save less to induce later retirement. Still earlier selves may think the pre-retirement self does this too much, saving more to induce early retirement. The consumption pattern may be different from that with exponential discounting. Other observational non-equivalence includes the impact of changing mandatory retirement rules or work incentives on savings and a possibly negative marginal propensity to consume out of increased future earnings. Naive agents are briefly considered.

(with Peter Diamond); Journal of Public Economics (2003), 87(9-10), pp. 1839-1872 [Lead article.]





Is Addiction `Rational?' Theory and EvidenceAbstract:

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 difficulty 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.

(with Jonathan Gruber); Quarterly Journal of Economics (2001), 116(4), pp. 1261-1305





Comparison of Magnetocaloric Properties from Magnetic and Thermal MeasurementsAbstract:

The isothermal change of the magnetic entropy of a magnetically ordered material upon application of external magnetic field can be calculated from the temperature and field dependence of the magnetization or of the specific heat. The adiabatic temperature change, i.e., the magnetocaloric effect ~MCE! can be measured directly or can be calculated via different methods using the field-dependent specific heat values, or a combination of data obtained via magnetization and thermal measurements. In the present study, magnetic and thermal measurements were carried out on Gd75Y25(TC=232 K) and Gd48Y52(TC=161 K) samples, for applied fields ranging between 0 and 7 T. From both datasets, the magnetic entropy change and MCE values were calculated and compared, in order to assess the mutual reliability of the methods applied. The magnetically or thermally deduced specific heat discontinuities show a reasonable agreement within experimental error. Similar comparison of the calculated magnetic entropy changes reveals that the measured transition temperature and the shape of the curve do not depend on the method selected. It is demonstrated that the choice of an integration constant during entropy calculation has a significant impact on the adiabatic temperature change deduced from the field and temperature dependence of the entropies. For the MCE, a better approximation can be obtained using the magnetically acquired magnetic entropy change and the field-dependent specific heat. The results prove that magnetic measurements carried out in high enough magnetic fields provide reliable information on the isothermal magnetic entropy change and, when combined with field-dependent specific heat measurements, on the magnetocaloric effect as well.

(with M. Foldeaki, W. Schnelle, E. Gmelin, P. Benard, A. Giguere, R. Chahine, and T. K. Bose); Journal of Applied Physics (1997), 82(1), pp. 309-316