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We document a dynamic inconsistency in risky choice. Using a unique brokerage dataset and two preregistered experiments, we compare people's initial risk-taking plans to their subsequent decisions. In both settings, people accept risk as part of a ``loss-exit" strategy---planning to continue taking risk after gains and stopping after losses. Actual behavior follows the reverse pattern, deviating from initial strategies by cutting gains early and chasing losses. More individuals accept risk when offered a commitment to their initial strategy. Our results help reconcile seemingly contradictory findings on risk-taking in static versus dynamic contexts. We discuss implications for theory and welfare.

We operationalise the theoretical modelling of Marin-Solano and Jorge Navas (2010), seeking to understand the consequences for optimal consumption, life insurance and annuity demand in a time inconsistent world, by incorporating the insurance insights from Richard (1975). Richar, in particular, has an elegant treatment of optimal annuity demand, rarely harnessed in the literature. Central to Richard’s creation of demand for personal insurance is a bequest motive and, in addition to implementing time inconsistency through hyperbolic discounting, our analysis is further expanded to include naive and sophisticated agents with a luxury bequest motive (Lockwood, 2012). Compared to a more simplistic ‘necessity’ bequest framework, luxury bequests (broadly) weaken optimal life insurance demand and strengthen optimal life annuity demand for the less wealthy. In contrast, time inconsistency offers a wide spectrum of outcomes, and our modelling, calibrated to Swiss data, contributes to understanding the annuity puzzle—observed low levels of (voluntary) purchases of life annuities.

Recent work in behavioral economics has shown that stress increases choices of smaller, sooner gains relative to larger, later monetary gains. The simplest model that explains these findings is one in which stress increases the discount rate or present bias. A sharp test of this model is provided by intertemporal choices in the losses or effort domain: this model predicts that stress should lead to increased choice of larger, later losses or effortful tasks relative to smaller, earlier ones. Here we show suggestive evidence for the opposite result: using a laboratory experiment with 578 participants from informal settlements in Nairobi, Kenya, we find that stress increases choices of smaller, sooner outcomes across domains. Specifically, we show that the effect is present in monetary gains and losses, and effortful tasks; and for both a psychosocial stressor (Trier Social Stress Test), and the pharmacological elevation of stress hormone levels using hydrocortisone. Importantly, the results are statistically robust only in the absence of clustering, and should thus be regarded as tentative. However, they are at least initially consistent with a model in which stress increases discounting in the gains domain but decreases it in the losses and effort domains; or with a model in which stress decreases the utility of any future outcome. Thus, stress may affect intertemporal choice, but may do so through mechanisms other than a simple increase in discount rates or present bias.

We use data from an online financial service to show that many consumers fail to stick to their self-set debt paydown plans. This behavior is best explained by present bias. Our empirical approach is informed by a parsimonious model showing that the sensitivity of spending to paycheck receipt reflects a present-biased agents short-run impatience, and that this sensitivity is reduced by available resources only for agents who are aware (sophisticated) of their future impatience. Classifying users accordingly, we find that (i) sophisticated users debt paydown decreases with short-run impatience, and that (ii) planned paydown is most predictive of actual paydown for sophisticated users.

This paper establishes a reusable framework, including a stochastic heterogeneous quasi-hyperbolic (SHQH) discount function, its non-standard Hamilton–Jacobi–Bellman equation (HJB) and its naive and precommitted solutions. To gurantee the broad generalities of the framework, we adopt a game theoretic approach in the sense of refraining from imposing functional specifications. This framework is the first which attains sub-game equilibrium in the presence of heterogeneous preferences (e.g. coexistence of present bias and age-related increases in self-control). As an example, this framework is used to optimize an insurance policy-holder’s asset allocation. The results show: (i) the sophisticated paradigm (formulated via the SHQH HJB) yields higher life insurance investment than the precommitted and naive paradigms (formulated via conventional optimization); (ii) the very instantaneous gratification that composes the resistance to delayed rewards also necessitates the insurance consumption to circumvent this resistance.

Temptation bundling—pairing a pleasurable indulgence with a behavior that provides delayed rewards—combats present bias by making behaviors with delayed benefits more instantly-gratifying. If people are sophisticated and capable of following self-set rules to overcome present bias, they could benefit from learning about temptation bundling. Participants in a four-week exercise-boosting program (N = 6792) received either an audiobook with encouragement to temptation bundle, only an audiobook, or neither an audiobook nor encouragement to temptation bundle. Giving participants audiobooks and encouraging temptation bundling boosted their likelihood of a weekly workout by 10–14% and average weekly workouts by 10–12% during and up to seventeen weeks post-intervention. Relative to giving audiobooks alone, encouraging temptation bundling had a modest positive effect on exercise on the extensive margin. The marginal benefit of encouraging temptation bundling may be small because free audiobooks leak information: Simply providing an audiobook to exercise program participants suggests they should temptation bundle.

A chain of reinsurance is a hierarchical system formed by the subsequent interactions among multiple (re)insurance agents, which is quite often encountered in practice. This paper proposes a novel continuous-time framework for studying the optimal reinsurance strategies within a chain of reinsurance. The transactions between reinsurance buyers and sellers are formulated by means of Stackelberg games, in order to reflect the conflicting interests and unequal negotiation powers in the bargaining process. Assuming the variance premium principle and the mean–variance criterion on the surplus processes, we solve the time-consistent optimal reinsurance demands and pricing strategies in explicit forms, which are surprisingly plain. Based on the proposed reinsurance chain models, our in-depth theoretical analysis shows that: (a.) it is optimal to situate more (resp. less) risk averse reinsurers to the latter (resp. former) positions in a chain of reinsurance; (b.) adding new reinsurers will lower the reinsurance prices at all levels in a chain of reinsurance, promoting the existing agents to rationally control their respective risk exposures; and essentially (c.) alleviate the systemic risk in the chain structure.

Excessive consumption of many vice goods (e.g., alcohol) has both possible immediate (e.g., a drunk-driving crash) and delayed (e.g., liver disease) negative consequences. This research models the consumption choices of a consumer population with heterogeneous impatience and varying degrees of sophistication in conjunction with both immediate and delayed consequences of excessive vice good consumption. We show that even when a preventative device (e.g., a designated driver) that could eliminate the immediate dangers is available for (almost) free, some consumers forgo it in order to try to use the immediate danger as a soft tool to regulate excessive consumption (e.g., “If I know I don't have a designated driver, then I won't drink too much.”). Surprisingly, this “flying without a net” is a successful strategy for some consumers, and we quantify when it is likely to be successful versus harmful. This counterintuitive result has many consequences; e.g., public policies that make the provision of preventative devices compulsory could increase consumer welfare under certain conditions but overall are not Pareto-improving. Likewise, advertising campaigns that exaggerate the likelihood of immediate dangers may be welfare decreasing despite their good intentions. In exploring the effect of our model on pricing of preventative device, we find that pricing is not monotonic in the probability of danger. We also show that consumer pessimism about self-regulation can induce consumers to experience a “boomerang effect” of overconsumption in the presence of a preventative device. Overall our research shows that the relationship between prevention and risk is not as simple as might be assumed in standard analyses and that marketers and public policymakers often need to consider the short-term and the long-term risks as well how prone the consumers are to temptation and how sophisticated they are in judging their temptation.

This paper studies a time-inconsistent dividend problem in discrete time with nonex- ponential discounting. Motivated by the decreasing impatience in behaviour economics, a general discount function is used and assumed to be log sub-additive. Using a game-theoretic approach equilibrium barrier strategies are considered. It is shown that in the case of multiple equilibria, there exists an optimal one that pointwisely dominates all the other equilibria. Case studies are conducted where there is no equilibrium, multiple equilibria, and a unique equilibrium.

A game-theoretic framework for time-inconsistent stopping problems where the time-inconsistency is due to the consideration of a non-linear function of an expected reward is developed. A class of mixed strategy stopping times that allows the agents in the game to jointly choose the intensity function of a Cox process is introduced and motivated. A subgame perfect Nash equilibrium is defined. The equilibrium is characterized and other necessary and sufficient equilibrium conditions including a smooth fit result are proved. Existence and uniqueness are investigated. A mean–variance and a variance problem are studied. The state process is a general one-dimensional Ito diffusion.

The traditional Mundellian criterion, which implicitly assumes commitment to monetary policy, is that countries with similar shocks should form unions. Without such commitment a new criterion emerges: countries with dissimilar temptation shocks, namely those that exacerbate time inconsistency problems, should form unions. Critical to this new criterion is the idea that monetary policy is benevolent in that it takes into account the interests of all the countries in the union. When countries have dissimilar temptation shocks, benevolent unions can help overcome the time inconsistency problems that individual countries face. Existing unions can strictly gain by admitting new members with more severe time inconsistency problems, because policy in the expanded union is less sensitive to the temptation shocks of members of the existing union.

This paper investigates the open-loop equilibrium reinsurance-investment (RI) strategy under general stochastic volatility (SV) models. We resolve difficulties arising from the unbounded volatility process and the non-negativity constraint on the reinsurance strategy. The resolution enables us to derive the existence and uniqueness result for the time-consistent mean variance RI policy under both situations of constant and state-dependent risk aversions. We apply the general framework to popular SV models including the Heston, the 3/2 and the Hull–White models. Closed-form solutions are obtained for the aforementioned models under constant risk aversion, and the non-leveraged models under state-dependent risk aversion.

We study procrastination in the context of a field experiment involving students who must exert costly effort to complete certain tasks by a fixed deadline. Students display a strong demand for commitment in the form of self-imposed deadlines. However, deadlines appear not to increase task completion rates. Students who report themselves as being more disorganized delay task completion significantly more. We estimate that the fraction of students displaying present bias in our sample is over 40%. Furthermore, we structurally estimate present bias and other possible behavioral aspects of students' decision making by fitting the experimental data on both completion rates and failed attempts through a stylized stopping time choice model. The point estimate of present bias is 30% in our preferred specification. Present-bias appears, however, not to significantly affect behavior in the context of repeated similar tasks. This suggests various frame effects whereby repeated similar task activate internal self-control. Beyond present bias, our results indicate that other behavioral characteristics play an important role in inducing procrastination.

It is well-known that for a group of decision makers with stationary time preferences their collective time preferences may become non-stationary. In particular, Jackson and Yariv (2014) show that aggregating heterogeneous exponential discount functions yields a function that exhibits what they call “present bias”. In a continuous-time setting “present bias” is equivalent to strictly decreasing impatience (DI). Applying the notion of comparative DI introduced by Prelec (2004), we generalise Jackson and Yariv’s result: mixing any finite number of heterogeneous discount functions from the same DI equivalence class (such as exponential discount functions) yields a mixture that exhibits uniformly more DI than each component. We also obtain necessary and sufficient conditions for mixtures of DI-ordered – but not necessarily DI-equivalent – functions to be uniformly more DI than the least DI component. For suitably smooth discount functions, Prelec (2004) defines a local index of DI. We use this to obtain local versions of our results, which apply to mixtures of any finite set of (smooth) discount functions. Our main theorems generalise a number of specialised results in the decision theory and survival analysis literatures.

The majority of deaths in adolescence have been attributed to “risky” behaviors ( Eaton et al., 2012 ) and therefore could be avoided had the adolescent made a different decision. In this paper, using two laboratory experiments we assess the impact of peer observation (a possible culprit of bad decision-making in adolescence) on the behavior of adolescents in risky conditions. We carefully separate risk attitudes from impatience, present bias, ambiguity attitudes, and inconsistency and in contradiction to what has been suggested in developmental psychology, we find that adolescents’ risk and ambiguity attitudes are not affected by observation. Instead, when observed by peers, adolescents become more impatient and inconsistent.

In this paper, we propose a definition of Hypothesis Testing Equilibrium (HTE) for general signalling games nested by an updating rule according to the Hypothesis Testing model characterized by Ortoleva (2012). In signalling games with non-Bayesian players where player 2 changes her original prior if she observes a small-probability (positive) message, an HTE may differ from a sequential Nash equilibrium because of dynamic inconsistency. However, in the case in which player 2 only treats a zero-probability message as an unexpected news, an HTE is a refinement of sequential Nash equilibrium. In Milgrom and Roberts (1982) model of limit pricing, there exists a unique HTE for each interesting case, in addition, the HTE survives the Intuitive Criterion but not vice versa.

It is well known that, in a world of rational expectations, time inconsistency is at the heart of policy failures. Strategic policy announcements in the form of forward guidance have assumed a more important role particularly when expansionary monetary policy is blocked by the zero lower bound (ZLB). This paper deals with the possibility that policy announcements avoid time inconsistency. This makes monetary policy more credible. Nevertheless, the non-credibility of an announcement of future policy can derive from a number of obstacles, including the possibility that the economy is hit by some kinds of shocks, particularly large-sized shocks. We show that shocks of any size can always be controlled by suitable policy rules if their design includes forward guidance and state contingent policy rules, as well as an appropriate but not restrictive choice of the policy parameters. This provides enhanced controllability and stabilize-ability – in particular in those cases where those properties had not been available before. To illustrate, we provide examples based on a dynamic representation of a reduced form DSGE model derived from the New Keynesian (NK) approach to modeling the economy. It turns out that there are some differences between the bounds on the permitted policy parameters which depend on whether we are tied to the ZLB or not. But stabilizing policy rules under forward guidance are always feasible and always available.

Blockchain technology has attracted a great deal of attentions as an effective way to innovate business processes. It has to be integrated with other Business Process Management system (BPM) components to implement specified functionalities related to the applications. The current efforts in integrating this technology into BPM are at a very early stage. To apply Blockchain into business processes efficiently, Blockchain and business process characteristics must be identified. Inconsistency of confirmation settlement that heavily relies on the implementation of consensus protocol poses a major challenge in business process operations, especially ones that are time-critical. In addition, validators, nodes responsible for performing consensus operations in a Blockchain system, can introduce bias and as a result are not trustable. This paper first defines Blockchain and also investigates the characteristics of Blockchain and business processes. Then, we suggest an architecture of business processes in Blockchain era to overcome the problems of time inconsistency and consensus bias. The architecture provides persistency, validity, auditability, and disintermediary that Blockchain offers. The architecture also provides flexibility by allowing business partner to select nodes in performing consensus; thus bias is mitigated.

The standard approach to welfare analysis under dynamically inconsistent preferences is to assume that the welfare of an individual is maximized if he can commit to his initial goal. We study a potential rationale for such welfare analysis. In some prominent, well-studied examples with intertemporal tradeoffs (like the choice between investing in a project now or later, doing an unpleasant task now or procrastinating it until later, and eating a cake), we find that the commitment allocation can multiself Pareto dominate the non-cooperative equilibrium allocation if the number of time-dated selves exceeds a low threshold. While a common concern with behavioral welfare analysis is that the later selves of an individual are unfairly hurt as a result of committing the individual to his initial goal, our findings indicate that this concern may be more relevant for settings where the number of sequential choices is very low.

Firms often set long notice periods when consumers cancel a contract, and sometimes do so even when the costs of changing or canceling the contract are small. We investigate a model in which a firm offers a contract to consumers who may procrastinate canceling it due to naive present-bias. We show that the firm may set a long notice period to exploit naive consumers.

Despite economic, social and environmental benefits, the uptake of energy-saving compact fluorescent lamp light bulbs (CFLs) in Kibera, an informal settlement in Nairobi, remains low. We conducted a randomized controlled field experiment involving 651 Kibera residents assessing whether the joint impact of monetary incentives and behavioral interventions (pre-commitment and simplified information highlighting CFL benefits) could increase CFL uptake. A monetary incentive covering the incremental cost of a CFL compared to an incandescent bulb positively impacted uptake. However, adding simplified information more than tripled the impact of the monetary incentive alone, resulting in a remarkable uptake rate of about 84%. While a post endline survey conducted two years following the administration of the randomized control trial does not find lasting effects, this paper provides evidence for additional behavioral hypotheses in developing countries, also assessing the contribution of intelligence and measured discount rates to account for potential household present bias. It is to date the only intervention of its type that explores the extent to which behavioral interventions can complement monetary incentives.

It has been argued that hyperbolic discounting of future gains and losses leads to time-inconsistent behavior and thereby, in the context of health economics, not enough investment in health and too much indulgence of unhealthy consumption. Here, we challenge this view. We set up a life-cycle model of human aging and longevity in which individuals discount the future hyperbolically and make time-consistent decisions. This allows us to disentangle the role of discounting from the time consistency issue. We show that hyperbolically discounting individuals, under a reasonable normalization, invest more in their health than they would if they had a constant rate of time preference. Using a calibrated life-cycle model of human aging, we predict that the average U.S. American lives about 4 years longer with hyperbolic discounting than he would if he had applied a constant discount rate. The reason is that, under hyperbolic discounting, experiences in old age receive a relatively high weight in life time utility. In an extension we show that the introduction of health-dependent survival probability motivates an increasing discount rate for the elderly and, in the aggregate, a u-shaped pattern of the discount rate with respect to age.

This paper develops a dynamic general equilibrium model in which households have a preference of quasi-geometric discounting, as in Krusell et al. (2002), and face a cash-in-advance constraint. Through this extension, we show that this economy engages in over-saving, although households have present bias, and the optimal growth rate of money when there is present bias is lower than one when there is not.

We show that communication interventions – which have become globally pervasive during the COVID-19 pandemic – promote individuals' consumption and psychological well-being. Partnering with a major telecommunication company, we field communication programs that provide either a “lump-sum mobile phone calling credit” or “monthly tranches of mobile phone calling credit” to a nationally representative set of low-income adults in Ghana during the crises. Individuals' inability to make unexpected calls, unexpected need to borrow SOS airtime, and to seek digital loans decreased dramatically relative to a control group. As a result, the programs led to a significant decrease in mental distress (-9.8%) and the likelihood of severe mental distress by -2.7 percentage points (quarter the mean prevalence), with null impact on consumption expenditure. Monthly mobile credits are more likely than lump-sum mobile credits to “sustain” larger impacts, suggesting that individuals may face time inconsistency and /or social pressure problems. We emphasize the value of communication and need for many installments of communication transfers during pandemics.

Humans are social animals but sometimes stay alone. The paper investigates the connection between an intraperson game and an interperson interaction. Motivated beliefs supplied from memory management due to present bias in the individual investment problem give rise to a positive spillover on others through social interactions. Our result establishes a positive relationship between overconfidence and prosocial behaviors and suggests that a high frequency of social interactions reduces an individual's tendency to cooperate with others, exacerbating the freeriding problem. Our empirical finding shows that people in countries with indulgent cultures tend to be more confident in terms of Rosenberg's self-competence score, individuals living in countries with a high population density or an extended family system appear less confident, and those in countries with high self-competence scores are more agreeable in Big Five personality traits, largely supporting our model's implications.

We propose a broadly applicable empirical approach to classify individuals as time-consistent versus naive or sophisticated regarding their self-control limitations. Operationalizing our approach based on nationally representative data reveals that self-control problems are pervasive and that most people are at least partly aware of their limited self-control. Compared to naifs, sophisticates have higher IQs, better educated parents, and are more likely to take up commitment devices. Accounting for both the level and awareness of self-control limitations has predictive power beyond one-dimensional notions of self-control that neglect awareness. Importantly, sophistication fully compensates for self-control problems when choices involve immediate costs and later benefits. Raising people's awareness of their own self-control limitations may thus assist them in overcoming any adverse consequences.

Time-inconsistent internet users neglect future privacy costs and release too much data to be monetized by digital platforms. We study how regulations that require user consent for data processing affect platform profits, welfare and user surplus, depending on business models and the degree of time inconsistency. Consent mechanisms increase user surplus or welfare only if their design facilitates consent refusal. If platforms can make it difficult to opt out, it may be better for society as a whole if the former choose the disclosure level, even though it tends to be excessive from a user point of view. Voluntary caps on usage, as recently adopted by some platforms, can raise profits by making some users consent to more disclosure.

This paper is concerned with the nature of temptation in stochastic choice models. In particular, we study the distinction between the two leading approaches to modeling temptation in the literature (dynamic inconsistency and costly self-control) when preferences are stochastic. We first design an experimental methodology to distinguish random Strotz preferences from random Gul-Pesendorfer (GP) preferences. We then implement this method in a field experiment that uses data on choices of menus combined with data on choices from menus of food items in a large pool of subjects during a three month period. The results show the presence of large proportions of both random Strotz types and random GP types.

Quasi-hyperbolic discounting is one of the most well-known and widely-used models to capture selfcontrol problems in the economics literature. The underlying assumption of this model is that agents have a “present bias” toward current consumption such that all future rewards are downweighed relative to rewards in the present (in addition to standard exponential discounting for the length of delay). We report a meta-analytic dataset of estimates of the present bias parameter 𝛽 based on searches of all major research databases (62 papers with 81 estimates in total). We find that the literature shows that people are on average present biased for both monetary rewards (𝛽 = 0.82%-|-| confidence interval of [0.74, 0.90]) and non- monetary rewards (𝛽 = 0.66, 95% confidence interval of [0.51, 0.85]) but that substantial heterogeneity exists across studies. The source of this heterogeneity comes from the subject pool, elicitation methodology, geographical location, payment method, mode of data collection (e.g. laboratory or field), and reward type. There is evidence of selective reporting and publication bias in the direction of overestimating the strength of present-bias (making 𝛽 estimates smaller), but present bias still exists after correcting for these issues (for money 𝛽 = 0.87 with 95% confidence interval of [0.82, 0.92] after correcting for selective reporting).

Overwhelming evidence suggests that a “culture of cooperation,” which is the implicit reward from cooperating in any economic activity, represents one of the most successful humanly devised social structures. Yet, our understanding of its determinants and impact is still limited. To clarify these issues, we propose a time inconsistency theory of state-building and we document that, in the world's most agricultural countries, adverse climate shocks push the nonelites to accumulate strong norms of cooperation. To illustrate, a strong culture signals the nonelites’ commitment to cooperate with the elites in joint investment activities despite the small expected payoff and encourages the elites to reciprocate by granting a more inclusive political process. These reforms, in turn, help convince the nonelites that a sufficient part of the investment returns will be shared via public good provision. Our estimates imply that the severity of droughts has two short run effects on agricultural output, a negative impact due to worse farming conditions and a positive effect due to stronger norms of trust and respect. Accordingly, policymakers should consider the direct and indirect impacts of climate change and favor endogenous cultural formation. Moreover, environmental policies should be designed through a more credible interdisciplinary approach.

The deferred recognition of COVID-induced losses at banks in many countries has reignited the debate on regulatory forbearance. This paper presents a model where the public's own political pressure drives regulatory policy astray, because the public is poorly informed. Using probabilistic game stages, the model parameterizes how time consistent policy is. The interaction between political motivations and time consistency is novel and complex: increased policy credibility can entice the politically-motivated regulator to act in the public's best interest, or instead repel it from doing so. Considering several regulatory instruments, the paper probes the nexus of political pressure, perverse bank incentives and time inconsistent policy.

We show that central banks face a time inconsistency problem when publishing bank stress test results. Before a stress test, they want to appear tough as the threat of letting banks fail the stress test incentivizes prudent behaviour. After the stress test, they want to act soft by releasing only partial information in order to reassure financial markets about bank health. We characterize an institutional design solution to this commitment problem: a social planner sets the framework within which the central bank communicates. We find that a hurdle rate framework, where all banks are judged to pass or fail relative to a common threshold, is optimal in many settings as it generates intermediate levels of both incentives and reassurance. With a hurdle rate framework, stress tests become an informational contagion channel, as changes in the health of one bank affect beliefs about the health of other banks. Thus, informational contagion can be a feature of a socially optimal institutional design in the presence of a time inconsistency problem.

We study the optimal design of a disinflation plan by a planner who lacks commitment and has imperfect control over inflation. The government’s reputation for being committed to the plan evolves as the public compares realized inflation to the announced targets. Reputation is valuable as it helps curb inflation expectations. At the same time, plans that are more tempting to break lead to larger expected reputational losses in the ensuing equilibrium. Taking these dynamics into consideration, the government announces a plan which balances promises of low inflation with dynamic incentives that make them credible. We find that, despite the absence of inflation inertia in the private economy, a gradual disinflation is preferred even in the zero-reputation limit.

We develop an approach to solve Barberis (2012)'s casino gambling model in which a gambler whose preferences are specified by the cumulative prospect theory (CPT) must decide when to stop gambling by a prescribed deadline. We assume that the gambler can assist their decision using an independent randomization, and explain why it is a reasonable assumption. The problem is inherently time-inconsistent due to the probability weighting in CPT, and we study both precommitted and naive stopping strategies. We turn the original problem into a computationally tractable mathematical program, based on which we derive an optimal precommitted rule which is randomized and Markovian. The analytical treatment enables us to make several predictions regarding a gambler's behavior, including that with randomization they may enter the casino even when allowed to play only once, that whether they will play longer once they are granted more bets depends on whether they are in a gain or at a loss, and that it is prevalent that a naivite never stops loss., Comment: 50 pages, 12 figures

We develop a theoretical model to study investors' trading behavior in the presence of large shareholders' influence on a firm's equity. We show that, for a good stock, large shareholders may invest a higher proportion of their wealth in the firm than smart small investors, although they predict the same equity return. Insight is also cast into the impacts of board structure on the firm's equity when the firm possesses several large influential shareholders: (i) the large shareholders collude in trading, and each tends to invest more aggressively as other large shareholders do, and (ii) firms with sole ownership can outperform those with dispersed ownership, if the impact coefficient of the former case exceeds or coincides with the aggregated impact coefficients of the latter.

Despite the short run negative effect of adverse climate shocks on economic outcomes is undisputed, our understanding of their long run institutional impact is limited. To clarify this issue, we propose a time inconsistency theory of state-building and we document that, in the world's most agricultural countries, severe droughts pushed the elites to grant a more inclusive political process. This reform convinced the nonelites that a sufficient part of the returns on joint farming investments would be shared via public good provision and, thus, to cooperate. To elaborate, the severity of droughts has a negative and short run direct effect on agricultural output, whereas its institutional impact is positive and persistent. Moreover, reforms towards more inclusive political institutions shift tax revenues from military to education expenditures and, thus, exert a positive and delayed impact on agricultural output. These results suggest that policymakers should: (a) consider short and long run effects of climate change; (b) calibrate climate-related policies according to the degree of complementarity of group-specific skills; (c) avoid the unfettered transplantation of strong political rights in all developing countries. From a methodological point of view, our analysis emphasizes the need of combining natural and social sciences to inform policy intervention.

The paper analyzes the effects of present-biased preferences on the transfer of resources to future generations in the framework of renewable resource harvesting. The paper assumes that the current generation has other-regarding motivations for future generations, expressed through the adherence to spontaneous other-regarding preferences or social norms. Because the short-sighted behavior imposed by the “dictatorship of the present” can cause a reduction in the well-being of future generations, despite the existence of social preferences, the model presented in this study demonstrates that if the social preferences are also expressed through social norms that prescribe no reevaluation of the harvesting decisions, a mitigation of the effect of present bias on intergenerational equity can occur. In this paper, the model presented shows the properties that a social norm should have to avoid the intergenerational inequality that can be derived from present-biased preferences in intergenerational renewable resource management. Additionally, the model defines the necessary and sufficient conditions such that the implementation of the social norm can neutralize the effect of present-biased preferences, guaranteeing the optimal harvesting path defined at the beginning.

This work shows that defective behaviors from the cooperative equilibrium in the management of common resources can be fueled and triggered by the presence of agents with myopic behaviors. The behavior implemented by naive agents, even if performed with cooperative intent, can activate a dynamic of cascading defections from the cooperative strategy within the harvesters’ group. This paper demonstrates and discusses that the apparent and detectable decay of the cooperative choices in the dilemmas of common resources is not an exclusive and indisputable signal of an escalation in free-riding intentions but also an outcome of the present-biased preferences and myopic behaviors of the cooperative agents. Notably, within the context populated by conditional cooperators with a heterogeneous myopic discount factor, in the absence of information on agents’ intentions, the present-biased preferences can trigger a strategy that directs the community to excessively increase its harvesting level, even in presence of the other-regarding motives. Therefore, lowering cooperative behaviors can also be the effect of the absence of coordination instruments in response to the cognitive bias that influences human behaviors.

Previous research has shown that some people voluntarily use commitment contracts that restrict their own choice sets. We study how people divide money between two accounts: a liquid account that permits unrestricted withdrawals and a commitment account that is randomly assigned in a between-subject design to have either a 10% early withdrawal penalty, or a 20% early withdrawal penalty, or not to allow early withdrawals at all (i.e., an infinite penalty). When the liquid account and the commitment account pay the same interest rate, higher early-withdrawal penalties attract more commitment account deposits. This pattern is predicted by the hypothesis that some participants are partially- or fully-sophisticated present-biased agents. Such agents perceive that higher penalties generate greater scope for commitment by disincentivizing (penalized) early withdrawals. The experiment also shows that when the commitment account pays a higher interest rate than the liquid account, the positive empirical slope relating penalties and commitment deposits is flattened, suggesting that naïve present-biased agents or agents with standard exponential discounting are also in our sample. Across all of our experimental treatments, higher early withdrawal penalties on the commitment account sometimes increase and never reduce allocations to the commitment account.

This paper studies whether saving behavior may reveal socially relevant intertemporal preferences. I decompose the present generation's preference for the next into its dynastic and cross-dynastic counterparts. Welfare weights on other dynasties can be motivated by a concern for sustainability or if descendants may move or marry. With such cross-dynastic intergenerational altruism, saving for one's descendants benefits present members of other dynasties, giving rise to preference externalities. I find that socially relevant intertemporal preferences may not be inferred from saving behavior if there is cross-dynastic intergenerational altruism. I also show that the external effect of present saving decreases over time.

This paper develops a dynamic wealth management model for risk-averse investors displaying present-bias in the form of hyperbolic discounting. The investor chooses an optimal consumption policy and allocates her funds between a risk-free asset, a traded liquid asset, and a non-traded illiquid asset. We characterize these policies for both sophisticated and naive present-biased investors. There are three results. First, sophisticated investors over-consume more than their naive counterparts if and only if their coefficient of relative risk-aversion is smaller than one. As a result, sophistication is welfare reducing (increasing) when risk-aversion is low (high). Second, increasing asset illiquidity always benefits the sophisticated investor more than the naive investor. Thus, the welfare gap between sophisticated and naive investors is increasing in the proxy for asset illiquidity. Finally, present-biased investors accumulate a larger share of their wealth in the non-traded illiquid asset than in the traded risky stock compared to the neoclassical exponential discounter investor. As a consequence, from the perspective of present-biased investors, the equity premium puzzle (1985) and the private equity puzzle (2002) are two sides of the same coin.

We study the personal credit market using unique individual-level data covering fintech and traditional lenders. We show that fintech lenders acquire market share by first lending to higher-risk borrowers and then to safer borrowers, and mainly rely on hard information to make credit decisions. Fintech borrowers are significantly more likely to default than neighbor individuals with the same characteristics borrowing from traditional financial institutions. Furthermore, they tend to experience only a short- lived reduction in the cost of credit, because their indebtedness increases more than non-fintech borrowers a few months after loan origination. However, fintech lenders' pricing strategies are likely to take this into account. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

We examine the relationship between body mass index (BMI), health habits, and financial risk and time preferences. Using a sample of 128 undergraduate business students, we find that participants with higher BMI exhibit greater utility function curvature, greater loss aversion, and greater inability to delay gratification. Additionally, we find that higher fruit consumption and exercise are negatively related to loss aversion; whereas increased vegetable consumption is negatively related to giving stronger weights to payoffs that are closer to the present time (i.e. the present bias). Overall, our results demonstrate that individuals who engage in healthy habits, just as lower BMI, better diet, and exercise more, have a greater tendency to display rational financial decision-making compared to those who do not. These results have important broader implications for the current national and international discussions regarding the societal impact of rising levels of obesity and poor health habits throughout the world.

This paper studies the welfare of time-inconsistent, partially sophisticated agents living under two different regimes, one with complete, unfettered credit markets (CM) and the other with endogenous borrowing constraints (EBC) where the borrowing limits are set to make agents indifferent between defaulting and paying back their unsecured loans. The CM regime cannot deliver the first best because partially sophisticated agents would undo plans laid out by previous selves and borrow too much. Somewhat counterintuitively, in some cases, the EBC regime may deliver higher welfare than the CM regime. These results speak to the academic debate surrounding the creation and functioning of the CFPB (Consumer Financial Protection Bureau) in the U.S. and its implementation of the ability-to-repay rule on lenders after the 2007-8 crisis. Such institutions generate commitment publicly and may help time inconsistent agents economize on the costs of private commitment provision.

This paper demonstrates that, in a large class of linear-quadratic models with rational expectations, losses due to time-inconsistency problems can be avoided, as the commitment solution can be implemented by a policy-maker who acts under discretion. We focus on two approaches. First, we show that a non-Markovian, reputational equilibrium that implements the commitment solution always exists. Second, we show how delegation to a policy-maker with an additional objective for the policy instrument can be used to implement the commitment solution via a standard discretionary Markov equilibrium. Implementation is facilitated by the fact that the commitment outcome can be attained irrespective of the weight that the policy-maker assigns to the additional target. Using the standard new Keynesian model as an example, we study the dynamics of the economy under optimal additional output targets as well as optimal interest-rate targets for central banks.

Traditionally, models of central banks assume they either ignore past constraints (discretion) or completely integrate them (commitment) into today's decision making. I show how the temptation to ignore the past can be taken seriously to produce intermediate behavior. I ground the analysis in micro-theoretic treatment of temptation for a two-period model. Then, I develop an extension of recursive contracts that accommodates a broad class of intermediate decision-making processes. Next I develop a particular example of "scaled commitment." It can model central banks succumbing to stabilization bias after the zero lower bound, but resisting inflation bias. Finally, I provide a general derivation of the recursive approach for any problem with a forward-looking constraint.

The paper examines how rules and institutions as well as the monetary-fiscal coordination setup impact welfare outcomes of a reform during uncertainty shocks. We define uncertainty shocks as sudden events that create ambiguity about future course of economic policies chosen by policy makers as well as the possible responses of economic agents to the new policies. We examine uncertainty within a framework of interaction between several institutional factors: (1) the scheme of coordination between monetary and fiscal authorities, (2) credibility and reputation of authorities and (3) the degree of dependence on discretionary measures as opposed to commitments. Through a game theoretic model, we show that: first, a reform implemented under fiscal dominance accompanied with dependence on discretionary measures result in worst welfare outcomes that are magnified when uncertainty parameters are involved. Second, in the case of central bank independence and immunity to fiscal concerns, reforms signal fiscal discipline and produce desired outcomes. Third, proper fiscal rules and commitments under a scheme of benevolent and coordinating authorities are second best during uncertainty shocks and relatively lessen undesired outcomes due to higher credibility and lower time inconsistency. The results offer important policy implications in developing countries with structural fiscal and monetary problems where hazards of fiscal dominance, reliance on politically-driven discretionary interventions and lacking efficient rules and institutions are magnified during spells of political crises and usually result in undesirable welfare gains.

Economists model self-control problems through time-inconsistent preferences. Empirical tests of these preferences largely rely on experimental elicitation methods using monetary rewards, with several recent studies failing to find present bias for money. In this paper, we compare estimates of present bias for money with estimates for healthy and unhealthy foods. In a within-subjects longitudinal experiment with 697 low-income Chinese high school students we find strong present bias for both money and food, and that individual measures of present bias are moderately correlated across reward types. Our experimental measures of time preferences over money predict field behaviours better than preferences elicited over foods.

When consuming goods provided by public utilities, such as telecommunication, water, gas or electricity, the predominant payment scheme is pay-later billing. This paper identifies one potential consequence of pay-later schemes, present-biased overconsumption of the respective good, and tests the effectiveness of pay-as-you-go schemes in reducing consumption. Specifically, I run a lab experiment which mimics an energy consumption choice and randomizes the timing of when consumption costs are paid: Either immediately (‘pay-as-you-go’) or one-week after consumption (‘pay-later’). Results show that pay-as-you-go billing significantly decreases consumption, and in particular wasteful consumption. As the design controls for contaminating effects, these results can be solely attributed to present-biased discounting under the pay-later scheme. These results imply that pay-as-you-go schemes will be welfare improving both from agent’s own perspective and from a social perspective if externalities are involved. In contrast, classic price-based polices will need correctives to account for present bias arising under pay-later schemes.

This paper rationalizes both present and future bias in a single expected utility framework. The model considers a situation where mortality risk depends on the current state of health. When the state transition satisfies total positivity of order 2, rational decision makers are shown to have present bias when in poor health and future bias when in good health. The findings suggest that unhealthy behavior and resulting poor health may be the cause of present bias not its consequence as is often believed.