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Commitment through risk

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  • Kylymnyuk, Dmytro
  • Wagner, Alexander K.

Abstract

We show that risk-averse hyperbolic-discounting agents can benefit from positive exposure to risk and thus behave as if risk-loving. When the benefits of costly effort are delayed, selecting some risk concerning the outcome of one’s own effort can serve as an intrapersonal commitment device for exerting higher effort, thereby attenuating the negative effect of time-inconsistency. Comparing the effects of time-inconsistency, risk aversion and prudence, we formulate an intuitive condition for risk exposure to be an optimal strategy and discuss several applications of this result.

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Bibliographic Info

Article provided by Elsevier in its journal Economics Letters.

Volume (Year): 116 (2012)
Issue (Month): 3 ()
Pages: 295-297

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Handle: RePEc:eee:ecolet:v:116:y:2012:i:3:p:295-297

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Web page: http://www.elsevier.com/locate/ecolet

Related research

Keywords: Time-inconsistency; Risk aversion; Prudence; Effort provision;

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  12. Dan Lovallo & Colin Camerer, 1999. "Overconfidence and Excess Entry: An Experimental Approach," American Economic Review, American Economic Association, vol. 89(1), pages 306-318, March.
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