PEER-REVIEWED PUBLICATIONS
Understanding Markets with Socially Responsible ConsumersAbstract:
Many consumers care about climate change and other externalities associated with their purchases. We analyze the behavior and market effects of such "socially responsible consumers" in three parts. First, we develop a flexible theoretical framework to study competitive equilibria with rational consequentialist consumers. In violation of price taking, equilibrium feedback non-trivially dampens the impact of a person's consumption on aggregate consumption, undermining the motive to mitigate. This leads to a new type of market failure, where even consumers who fully "internalize the externality" overconsume externality-generating goods. At the same time, socially responsible consumers change the relative effectiveness of taxes, caps, and other policies in lowering the externality. Second, since consumer beliefs about and preferences over their market impacts play a crucial role in our framework, we investigate them empirically via a tailored survey. Consistent with our model, consumers are often consequentialist, and many believe that they have a dampened impact on aggregate consumption. Inconsistent with our model, however, we also find many respondents who expect to have a one-to-one impact on aggregate consumption. Third, therefore, we analyze how such "naive" consumers modify our theoretical conclusions. They consume less than rational consumers in a single-good economy, but may consume more in a multi-good economy with cross-market spillovers. A mix of naive and rational consumers may yield the worst outcomes.
Joint with Marc Kaufmann and Peter Andre. Accepted, Quarterly Journal of Economics. Updated March 2024. Online Appendix.
Steering Fallible ConsumersAbstract:
Online intermediaries with information about a consumer's tendencies often "steer" her toward products she is more likely to purchase. We analyze the welfare implications of this practice for "fallible" consumers, who make statistical and strategic mistakes in evaluating offers. The welfare effects depend on the nature and quality of the intermediary's information and on properties of the consumer's mistakes. In particular, steering based on high-quality information about the consumer's mistakes is typically harmful, sometimes extremely so. We argue that much real-life steering is of this type, raising the scope for a broader regulation of steering practices.
Joint with Paul Heidhues and Mats Köster. Economic Journal (2023), 133(652), pp. 1430-1465. Described (in German) in
Zeit Online.
Fragile Self-EsteemAbstract:
We develop a model of fragile self-esteem — self-esteem that is vulnerable to objectively unjustified swings — and study its implications for choices that depend on, or are aimed at enhancing or protecting, one's self-view. In our framework, a person's self-esteem is determined by sampling his memories of ego-relevant outcomes in a fashion that in turn depends on how he feels about himself, potentially creating multiple fragile "self-esteem personal equilibria." Self-esteem is especially likely to be fragile, as well as unrealistic in either the positive or the negative direction, if being successful is important to the agent. A person with a low self-view might exert less effort when success is more important. An individual with a high self-view, in contrast, might distort his choices to prevent a collapse in self-esteem, with the distortion being greater if his true ability is lower. We discuss the implications of our results for mental well-being, education, job search, workaholism, and aggression.
Joint with George Loewenstein and Takeshi Murooka. Review of Economic Studies (2022), 89(4), pp. 2026-2060.
Browsing versus Studying: A Pro-Market Case for RegulationAbstract:
We identify a competition-policy-based argument for regulating the secondary features of complex or complexly-priced products when consumers have limited attention. Limited attention implies that consumers can only "study" a small number of complex products in full, while -- by failing to check secondary features -- they can superficially "browse" more. Interventions limiting ex-post consumer harm through safety regulations, caps on certain fees, or other methods induce consumers to do more or more meaningful browsing, enhancing competition. We show that for a pro-competitive effect to obtain, the regulation must apply to the secondary features, and not to the total price or value of the product. As an auxiliary positive prediction, we establish that because low-value consumers are often more likely to study -- and therefore less likely to browse -- than high-value consumers, the average price consumers pay can be increasing in the share of low-value consumers. We discuss applications of our insights to health-insurance choice, the European Union's principle on unfair contract terms, food safety in developing countries, and the shopping behavior of (and prices paid by) low-income and high-income consumers.
Joint with Paul Heidhues and Johannes Johnen. Review of Economic Studies (2021), 88(2), pp. 708-729. Nice summaries in the
Financial Times (subscription required) and the
Independent. Version from November 2018.
Convergence in Models of Misspecified LearningAbstract:
We establish convergence of beliefs and actions in a class of one-dimensional learning settings in which the agent's model is misspecified, she chooses actions endogenously, and the actions affect how she misinterprets information. Our stochastic-approximation-based methods rely on two crucial features: that the state and action spaces are continuous, and that the agent's posterior admits a one-dimensional summary statistic. Through a basic model with a normal-normal updating structure and a generalization in which the agent's misinterpretation of information can depend on her current beliefs in a flexible way, we show that these features are compatible with a number of specifications of how exactly the agent updates. Applications of our framework include learning by a person who has an incorrect model of a technology she uses or is overconfident about herself, learning by a representative agent who may misunderstand macroeconomic outcomes, as well as learning by a firm that has an incorrect parametric model of demand.
Joint with Paul Heidhues and Philipp Strack. Theoretical Economics (2021), 16(1), pp. 73-99.
Choice Simplification: A Theory of Mental Budgeting and Naive DiversificationAbstract:
We develop a theory of how an agent makes basic multi-product consumption decisions in the presence of taste, consumption-opportunity, and price shocks that are costly to attend to. We establish that the agent often simplifies her choices by restricting attention to a few important considerations, which depend on the decision at hand and affect her consumption patterns in specific ways. If the agent's problem is to choose the consumption levels of many goods with different degrees of substitutability, then she may create mental budgets for more substitutable products (e.g., entertainment). In some situations, it is optimal to specify budgets in terms of consumption quantities, but when most products have an abundance of substitutes, specifying budgets in terms of nominal spending tends to be optimal. If the goods are complements, in contrast, then the agent may -- consistent with naive diversification -- choose a fixed, unconsidered mix of products. And if the agent's problem is to choose one of multiple products to fulfill a given consumption need (e.g., for gasoline or a bed), then it is often optimal for her to allocate a fixed sum for the need.
Joint with Filip Matějka. Quarterly Journal of Economics (2020), 135(2), pp. 1153-1207. Formerly titled “An Attention-Based Theory of Mental Accounting.”
Unrealistic Expectations and Misguided LearningAbstract:
We explore the learning process and behavior of an individual with unrealistically high expectations ("overconfidence") when outcomes also
depend on an external fundamental that affects the optimal action. Moving beyond existing results in the literature, we show that the agent's
beliefs regarding the fundamental converge under weak conditions. Furthermore, we identify a broad class of situations in which "learning"
about the fundamental is self-defeating: it leads the individual systematically away from the correct belief and toward lower performance. Due to
his overconfidence, the agent -- even if initially correct -- becomes too pessimistic about the fundamental. As he adjusts his behavior in response,
he lowers outcomes and hence becomes even more pessimistic about the fundamental, perpetuating the misdirected learning. The greater is the loss
from choosing a suboptimal action, the further the agent's action ends up from optimal. We partially characterize environments in which
self-defeating learning occurs, and show that the decisionmaker learns to take the optimal action if, and in a sense only if, a specific non-identifiability
condition is satisfied. In contrast to an overconfident agent, an underconfident agent's misdirected learning is self-limiting and therefore not very
harmful. We argue that the decision situations in question are common in economic settings, including delegation, organizational, effort, and
public-policy choices.
Joint with Paul Heidhues and Philipp Strack. Econometrica (2018), 86(4), pp. 1159-1214.
Naivete-Based DiscriminationAbstract:
We initiate the study of naivete-based discrimination, the practice of conditioning offers on external
information about consumers' naivete. Knowing that a consumer is naive increases a monopolistic
or competitive firm's willingness to generate inefficiency to exploit the consumer's mistakes,
so naivete-based discrimination is not Pareto-improving, can be Pareto-damaging, and often lowers total welfare
when classical preference-based discrimination does not. Moreover, the effect on total welfare depends on a
hitherto unemphasized market feature: the extent to which the exploitation of naive consumers distorts trade
with different types of consumers. If the distortion is homogenous across naive and sophisticated consumers,
then under an arguably weak and empirically testable condition, naivete-based discrimination lowers total
welfare. In contrast, if the distortion arises only for trades with sophisticated consumers, then perfect
naivete-based discrimination maximizes social welfare, although imperfect discrimination often lowers welfare.
And if the distortion arises only for trades with naive consumers, then naivete-based discrimination has
no effect on welfare. We identify applications for each of these cases. In our primary example, a credit
market with present-biased borrowers, firms lend more than socially optimal to increase the amount of
interest naive borrowers unexpectedly pay, creating a homogenous distortion. The condition for naivete-based
discrimination to lower welfare is then weaker than prudence.
Joint with Paul Heidhues. Quarterly Journal of Economics (2017), 132(2), pp. 1019-1054.
Inferior Products and Profitable DeceptionAbstract:
We analyze conditions facilitating profitable deception in a simple model of a competitive retail market. Firms selling
homogenous products set anticipated prices that consumers understand and additional prices that naive consumers ignore unless
revealed to them by a firm, where we assume that there is a binding floor on the anticipated prices. Our main results establish
that "bad" products (those with lower social surplus than an alternative) tend to be more reliably profitable than "good" products.
Specifically, (1) in a market with a single socially valuable product and sufficiently many firms, a deceptive equilibrium -- in
which firms hide additional prices -- does not exist and firms make zero profits. But perversely, (2) if the product is socially
wasteful, then a profitable deceptive equilibrium always exists. Furthermore, (3) in a market with multiple products, since a superior
product both diverts sophisticated consumers and renders an inferior product socially wasteful in comparison, it guarantees that firms can
profitably sell the inferior product by deceiving consumers. We apply our framework to the mutual-fund and credit-card markets, arguing
that it explains a number of empirical findings regarding these industries.
Joint with Paul Heidhues and Takeshi Murooka. Review of Economic Studies (2017), 84(1), pp. 323-356.
Exploitative InnovationAbstract:
We analyze innovation incentives in a simple model of a competitive retail market with naive consumers. Firms selling perfect substitutes play a game
consisting of an innovation stage and a pricing stage. At the pricing stage, firms simultaneously set a transparent "up-front price" and an "additional price,"
and decide whether to shroud the additional price from naive consumers. To capture especially financial products such as banking services, credit cards,
and mutual funds, we allow for a floor on the product's up-front price. At the preceding innovation stage, a firm can invest either in increasing the product's
value (value-increasing innovation) or in increasing the maximum additional price (exploitative innovation). We show that if the price floor is
not binding, the incentive for either kind of innovation equal the "appropriable part" of the innovation, implying similar incentives for exploitative and
value-increasing innovations. If the price floor is binding, however, innovation incentives are often stronger for exploitative than for value-increasing
innovations. Because learning ways to charge higher additional prices increases the profits from shrouding and thereby lowers the motive to unshroud,
a firm may have strong incentives to make appropriable exploitative innovations, and even stronger incentives to make non-appropriable exploitative
innovations. In contrast, the incentive to make non-appropriable value-increasing innovations is zero or negative, and even the incentive to make
appropriable value-increasing innovations is strong only if the product is socially wasteful. These results help explain why firms in the financial
industry have been willing to make innovations others could easily copy, and why these innovations often seem to have included exploitative features.
Joint with Paul Heidhues and Takeshi Murooka. American Economic Journal: Microeconomics (2016), 8(1), pp. 1-23. [Lead Article, featured
in AEA's research highlights.]
On the Welfare Costs of Naivete in the US Credit-Card MarketAbstract:
In the presence of naive consumers, a participation distortion arises in
competitive markets because the additional profits from naive consumers lead competitive
firms to lower transparent prices below cost. Using a simple calibration, we
argue that the participation distortion in the US credit-card market may be large. Our
results call for a redirection of some of the large amount of empirical research on
the quantification of the welfare losses from market power, to the quantification of
welfare losses that are due to the firms’ reactions to consumer misunderstandings.
Joint with Paul Heidhues. Review of Industrial Organization (2015), 47(3), pp. 341-354.
Behavioral Contract TheoryAbstract:
This review provides a critical survey of psychology-and-economics ("behavioral-economics") research in contract theory. First, I introduce the
theories of individual decisionmaking most frequently used in behavioral contract theory, and formally illustrate some of their implications in
contracting settings. Second, I provide a more comprehensive (but informal) survey of the psychology-and-economics work on classical contract-theoretic
topics: moral hazard, screening, mechanism design, and incomplete contracts. I also summarize research on a new topic spawned by psychology and economics,
exploitative contracting, that studies contracts designed primarily to take advantage of agent mistakes.
Journal of Economic Literature (2014), 52(4), pp. 1075-1118.
True Context-Dependent Preferences?
The Causes of Market-Dependent ValuationsAbstract:
A central assumption of neoclassical economics is that
reservation prices for familiar products express people’s true preferences for these products, that is, they represent
the total benefit that a good confers to the consumers, and are thus, independent of actual prices in the market.
Nevertheless, a vast amount of research has shown that valuations can be sensitive to other salient prices; particularly
when individuals are explicitly anchored on them. In this paper, the authors extend previous research on single-price
anchoring and study the sensitivity of valuations to the distribution of prices found for the product in the market.
In addition, they examine its possible causes. They find that market-dependent valuations cannot be fully explained by rational
inferences consumers draw about a product’s value, and are unlikely to be fully explained by true market-dependent preferences.
Rather, the market dependence of valuations likely reflects consumers’ focus on something other than the total benefit that the
product confers to them. Furthermore, this paper shows that market-dependent valuations persist when – as in many real-life
settings – individuals make repeated purchase decisions over time and infer the distribution of the product’s prices from their
market experience. Finally, the authors consider the implications of their findings for marketers and consumers.
Joint with Nina Mazar and Dan Ariely. Journal of Behavioral Decision Making (2014), 27; pp. 200-208.
Regular Prices and SalesAbstract:
It is widely known that loss aversion leads individuals to dislike risk, and as has been argued
by many researchers, in many instances this creates an incentive for firms to shield consumers and
employees against economic risks. Complementing previous research, we show that consumer
loss aversion can also have the opposite effect: it can lead a firm to optimally introduce risk into
an otherwise deterministic environment. We consider a profit-maximizing monopolist selling
to a loss-averse consumer, where (following Kõszegi and Rabin (2006)) we assume that the
consumer's reference point is her recent rational expectations about the purchase. We establish
that for any degree of consumer loss aversion, the monopolist's optimal price distribution consists
of low and variable "sale" prices and a high and atomic "regular" price. Realizing that she will
buy at the sale prices and hence that she will purchase with positive probability, the consumer
chooses to avoid the painful uncertainty in whether she will get the product by buying also
at the regular price. This pricing pattern is consistent with several recently documented facts
regarding retailer pricing. We show that market power is crucial for this result: when firms
compete ex ante for consumers, they choose deterministic prices.
Joint with Paul Heidhues. Theoretical Economics (2014), 9; pp. 217-251. Older (2011) version.
A Model of Focusing in Economic ChoiceAbstract:
We present a generally applicable theory of focusing based on the hypothesis that a person
focuses more on, and hence overweights, attributes in which her options differ more. Our model
predicts that the decisionmaker is too prone to choose options with concentrated advantages
relative to alternatives, but maximizes utility when the advantages and disadvantages of alternatives
are equally concentrated. Applying our model to intertemporal choice, these results
predict that a person exhibits present bias and time inconsistency when -- such as in lifestyle
choices and other widely invoked applications of hyperbolic discounting -- the future effect of a
current decision is distributed over many dates, and the effects of multiple decisions accumulate.
But unlike in previous models, in our theory (1) present bias is lower when the costs of current
misbehavior are less dispersed, helping to explain why people respond more to monetary
incentives than to health concerns in harmful consumption; and (2) time inconsistency is lower
when a person commits to fewer decisions with accumulating effects in her ex-ante choice. In
addition, a person does not fully maximize welfare even when making decisions ex ante: (3) she
commits to too much of an activity -- e.g., exercise or work -- that is beneficial overall; and (4)
makes "future-biased" commitments when -- such as in preparing for a big event -- the benefit of
many periods' effort is concentrated in a single goal.
Joint with Ádám Szeidl. Quarterly Journal of Economics (2013), 128(1); pp. 53-107.
Older version.
Exploiting Naivete about Self-Control in the
Credit MarketAbstract:
We analyze contract choices, loan-repayment behavior, and welfare in a model of a competitive credit market when borrowers have a taste for immediate gratification. Consistent with many credit cards and subprime mortgages, for most types of non-sophisticated borrowers the baseline repayment terms are cheap, but they are also inefficiently front-loaded and delays require paying large penalties. Although credit is for future consumption, non-sophisticated consumers overborrow, pay the penalties, and back-load repayment, suffering large welfare losses. Prohibiting large penalties for deferring small amounts of repayment -- akin to recent regulations in the US credit-card and mortgage markets -- can raise welfare.
Joint with Paul Heidhues. American Economic Review (2010), 100(5), pp. 2279-2303. Web Appendix (Proofs)
Utility from Anticipation and Personal
EquilibriumAbstract:
I develop a dynamic model of individual decisionmaking in which the agent
derives utility from physical outcomes as well as from rational beliefs about physical outcomes
("anticipation"), and these two payoff components can interact. Beliefs and behavior are jointly determined in a personal equilibrium by the requirement that behavior given past beliefs must be consistent with those beliefs. I explore three
phenomena made possible by utility from anticipation, and prove that if the decisionmaker's
behavior is distinguishable from a person's who cares only about
physical outcomes, she must exhibit at least one of these phenomena. First, the decisionmaker can be prone to self-fulfilling
expectations. Second, she might be time-inconsistent even if her preferences in all periods are
identical. Third, she might exhibit informational preferences, where these preferences are
intimately connected to her attitudes toward disappointments. Applications of the framework to
reference-dependent preferences, impulsive behaviors, and emotionally difficult choices are
discussed.
Economic Theory (2010), 44(3), 415-444.
Futile Attempts at Self-ControlAbstract:
We investigate costly yet futile attempts at self-control
when consumption of a harmful product has a binary
breakdown/no-breakdown nature and individuals tend to
underestimate their need for self-control. Considering
time-inconsistent preferences as well as temptation
disutility, we show that becoming more sophisticated can
decrease welfare and investigate what kind of mistaken beliefs
lead to low welfare. With time-inconsistent preferences, being
close to perfectly understanding one's preferences but
assigning zero probability to true preferences induces the
worst outcome.
Joint with Paul Heidhues. Journal of the European Economic Association (2009), 7(2-3), pp. 423-434.
Reference-Dependent Consumption PlansAbstract:
We develop a rational dynamic model in which people are loss averse over changes in beliefs about present and
future consumption. Because changes in wealth are news about future consumption, preferences over money are reference-dependent.
If news resonates more when about imminent consumption than when about future consumption, a decision maker might
(to generate pleasant surprises) overconsume early relative to the optimal committed plan, increase immediate consumption
following surprise wealth increases, and delay decreasing consumption following surprise losses. Since higher
wealth mitigates the effect of bad news, people exhibit an unambiguous first-order precautionary-savings
motive.; Web Appendix
Joint with Matthew Rabin. American Economic Review (2009), 99(3), pp. 909-936.
Choices, Situations, and HappinessAbstract:
This article explores some conceptual issues in the study of
well-being using the traditional
economic approach of inferring preferences solely from choice
behavior. We argue that choice
behavior alone can never reveal which situations make people better
off, even with unlimited
data and under the maintained hypothesis of 100% rational
choice. Ancillary assumptions or
additional forms of data such as happiness measures are always
needed. With such ancillary
assumptions and additional data, however, the use of revealed
preference to study well-being
can be significantly improved, so that the choices people make can
jointly identify preferences,
mistakes, and well-being.
Joint with Matthew Rabin. Journal of Public Economics (2008), 92, pp. 1821-1832.
Competition and Price Variation when Consumers are Loss
AverseAbstract:
We modify the Salop (1979) model of price competition with differentiated products by assuming that consumers are loss averse relative to a reference point given by their recent expectations about the purchase. 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. When firms face common stochastic costs, in any symmetric equilibrium the markup is strictly decreasing in cost. Even when firms face different cost distributions, we identify conditions under which a focal-price equilibrium (where firms always charge the same "focal" price) exists, and conditions under which any equilibrium is focal. (JEL D11, D43, D81, L13)
Joint with Paul Heidhues. American Economic Review (2008), 98(4), pp. 1245-1268.
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.
Joint 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.
Joint 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.
Joint 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.
Joint 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.
Joint 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.
Joint 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.
Joint 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
