OTHER PUBLISHED AND FORTHCOMING PAPERS
Behavioral Industrial Organization
Joint with Paul Heidhues. In Handbook of Behavioral Economics (2018), Eds. Douglas B. Bernheim, Stefano DellaVigna, and David Laibson, Volume 1,
Chapter 6, pp. 517-612.
Deception and Consumer Protection in Competitive MarketsAbstract:
This paper discusses some of our recent work on competitive markets in which consumers systematically
misunderstand either their own behavior, or contract or product features. We briefly
discuss evidence that consumers indeed systematically mispredict their own future behavior as
well as the abundance of evidence that consumers misunderstand certain contract or product
features. Based on Heidhues and Kőszegi (2010), we then introduce a competitive credit-market
model with time-inconsistent and partially naive borrowers, and discuss some implications for
possible consumer-protection regulation such as the US Credit CARD Act 2009 and the 2008
amendments by the Federal Reserve Board to the Truth in Lending Act. In that model as well as
in existing work on consumer misunderstanding of contract terms in competitive environments,
firms make ex-post profits from naive consumers but need to hand these profits back ex ante
to attract consumers. To highlight that in some important markets ex-ante competition is unlikely
to compensate for ex-post exploitation, we introduce a simple competitive-market model
with consumer misunderstandings in which the incentive of firms to hand these profits out ex
ante is limited by the presence of arbitrageurs who are not interested in the product itself but
who exploit contracts that hand out money ex ante. We identify conditions under which such
arbitrageurs effectively create a price floor, inducing firms to earn positive profits in seemingly
competitive industries. These conditions are likely met in many consumer finance markets, and
we propose that the resulting constraint on ex-ante competition is important for understanding
the functioning and regulation of these retail-finance markets.
Joint with Paul Heidhues and Takeshi Murooka. In the Anthology on Pros and Cons of Consumer Protection, 2011.
Revealed Mistakes and Revealed Preferences
Joint 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
Joint with Matthew Rabin. American Economic Review (2007), 97(2), pp. 477-481.
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.
