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Contract Design And Self-Control With Asymmetric Information

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Listed:
  • JIANYE YAN
  • BINQING XIAO
  • SANXI LI

Abstract

type="main" xml:lang="en"> We study optimal contracting by a monopolistic seller of investment goods to a time-inconsistent consumer and, in doing so, introduce asymmetric information to the model of DellaVigna and Malmendier (2004). We find (1) the below-marginal-cost-pricing rule may fail for a low-value consumer; (2) the firm's profit is no longer unaffected by the consumer's short-run impatience, as the latter is sophisticated. We find that there is an important threshold value of short-run patience. When the consumer's short-term patience is below this level, then, as the patience increases, the firm suffers. When the consumer's short-run patience is above this threshold, then, as it increases, the firm benefits. Finally, we show that unlike monopoly, perfect competition with asymmetric information achieves the first-best outcome. (JEL D03, D82, D91)

Suggested Citation

  • Jianye Yan & Binqing Xiao & Sanxi Li, 2014. "Contract Design And Self-Control With Asymmetric Information," Economic Inquiry, Western Economic Association International, vol. 52(2), pages 618-624, April.
    • Handle: RePEc:bla:ecinqu:v:52:y:2014:i:2:p:618-624
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    File URL: http://hdl.handle.net/10.1111/ecin.12068
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    References listed on IDEAS

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    1. Kfir Eliaz & Ran Spiegler, 2006. "Contracting with Diversely Naive Agents," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 73(3), pages 689-714.
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    3. Stefano DellaVigna & Ulrike Malmendier, 2004. "Contract Design and Self-Control: Theory and Evidence," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 119(2), pages 353-402.
    4. Yoram Halevy, 2008. "Strotz Meets Allais: Diminishing Impatience and the Certainty Effect," American Economic Review, American Economic Association, vol. 98(3), pages 1145-1162, June.
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    Cited by:

    1. Michael Grubb, 2015. "Behavioral Consumers in Industrial Organization: An Overview," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 47(3), pages 247-258, November.
    2. Michael D. Grubb, 2015. "Behavioral Consumers in Industrial Organization," Boston College Working Papers in Economics 879, Boston College Department of Economics.
    3. Florian Englmaier & Matthias Fahn & Marco A. Schwarz, 2016. "Long-Term Employment Relations when Agents are Present Biased," CESifo Working Paper Series 6159, CESifo.

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    More about this item

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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