Experimental evidence suggests that people make time-inconsistent choices and display overconfidence about positive personal attributes. Do these features affect consumer behavior in the market? To address this question we use a new panel data set from three US health clubs with information on the contract choices and the day-to-day attendance decisions of 7,978 health club members over three years. Members who choose a contract with a flat monthly fee of over $70 attend on average 4.8 times per month. They pay a price per expected visit of more than $17, even though a $10-per-visit fee is also available. On average, these users forgo savings of $700 during their membership. We review many aspects of the consumer behavior, including the interval between last attendance and contract termination, the survival probability, and the correlation between different consumption choices. The empirical results are difficult to reconcile with the standard assumption of time-consistent preferences and rational expectations. A model of time-inconsistent agents with overconfidence about future patience explains the findings. The agents overestimate the future attendance and delay contract cancellation whenever renewal is automatic. Salesman pressure and overstimation of future efficiency are the leading alternative explanations.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
10819.
Length: Date of creation: Oct 2004 Date of revision: Handle: RePEc:nbr:nberwo:10819
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Find related papers by JEL classification: D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis D18 - Microeconomics - - Household Behavior - - - Consumer Protection D21 - Microeconomics - - Production and Organizations - - - Firm Behavior D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving
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Ted O'Donoghue & Matthew Rabin, 1999.
"Doing It Now or Later,"
American Economic Review,
American Economic Association, vol. 89(1), pages 103-124, March.
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