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