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Imperfect Memory and the Preference for Increasing Payments

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  • John Smith

Abstract

We show how imperfect memory can imply a preference for increasing payments. We model an agent making a decision regarding effort in two periods. Before the first decision, the agent receives a signal related to the cost of effort, which is subsequently forgotten. Before the second decision, the agent makes an inference regarding the signal based on the publicly available information: the action taken and the wage paid. A preference for increasing payments naturally emerges. We show that this preference will only occur when the wage payments are neither very likely nor very unlikely to cover the cost of effort.

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Bibliographic Info

Article provided by Mohr Siebeck, Tübingen in its journal Journal of Institutional and Theoretical Economics.

Volume (Year): 165 (2009)
Issue (Month): 4 (December)
Pages: 684-700

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Handle: RePEc:mhr:jinste:urn:sici:0932-4569(200912)165:4_684:imatpf_2.0.tx_2-a

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References

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  1. David Hirshleifer & Ivo Welch, 2001. "An Economic Approach to the Psychology of Change: Amnesia, Inertia, and Impulsiveness," Yale School of Management Working Papers ysm185, Yale School of Management, revised 01 Aug 2009.
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  5. Loewenstein, George F & Sicherman, Nachum, 1991. "Do Workers Prefer Increasing Wage Profiles?," Journal of Labor Economics, University of Chicago Press, vol. 9(1), pages 67-84, January.
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  7. Manzini, Paola & Mariotti, Marco & Mittone, Luigi, 2006. "Choosing Monetary Sequences: Theory and Experimental Evidence," IZA Discussion Papers 2129, Institute for the Study of Labor (IZA).
  8. Gary Gigliotti & Barry Sopher, 1998. "Analysis of Intertemporal Choice: A New Framework and Experimental Results," Departmental Working Papers 199804, Rutgers University, Department of Economics.
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  12. Dow, James, 1991. "Search Decisions with Limited Memory," Review of Economic Studies, Wiley Blackwell, vol. 58(1), pages 1-14, January.
  13. Otto H. Swank, 2006. "The Self-Perception Theory vs. a Dynamic Learning Model," Tinbergen Institute Discussion Papers 06-092/1, Tinbergen Institute.
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Cited by:
  1. Sean Duffy & John Smith, 2013. "Preference for increasing wages: How do people value various streams of income?," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 8(1), pages 74-90, January.

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