American Economic Journal:
Microeconomics
ISSN 1945-7669 (Print) | ISSN 1945-7685 (Online)
Risk, Delay, and Convex Self-Control Costs
American Economic Journal: Microeconomics
vol. 3,
no. 3, August 2011
(pp. 34–68)
Abstract
We develop a dual-self model of self-control that is compatible with modern dynamic macroeconomic theory and evidence. We show that a convex cost of self-control explains a wide range of behavioral anomalies concerning risk, including the Allais paradox, and also explains the observed interaction between risk and delay. We calibrate the model to obtain a quantitative fit. We find that most of the data can be explained with subjective interest rates in the range of 1-7 percent, short-run relative risk aversion of about two, and a time horizon of one day for the short-run self. (JEL D11, D44, D81)Citation
Fudenberg, Drew, and David K. Levine. 2011. "Risk, Delay, and Convex Self-Control Costs." American Economic Journal: Microeconomics, 3 (3): 34–68. DOI: 10.1257/mic.3.3.34Additional Materials
JEL Classification
- D11 Consumer Economics: Theory
- D44 Auctions
- D81 Criteria for Decision-Making under Risk and Uncertainty
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