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Bounded Rationality as Deliberation Costs: Theory and Evidence from a Pricing Field Experiment in India

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  • Dean E. Spears

    (Princeton University)

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    Abstract

    How might bounded rationality shape decisions to spend? A field experiment verifies a theory of bounded rationality as deliberation costs that can explain findings from previous experiments on pricing in developing countries. The model predicts that (1) eliminating deliberation costs will increase purchasing at a higher price without impacting behavior at a lower price, (2) bounded rationality has certain greater effects on poorer people, and (3) deliberation costs can suppress screening by prices. Each prediction is confirmed by an experiment that sold soap in rural Indian villages. The experiment interacted assignment to different subsidized prices with a treatment that eliminated marginal deliberation costs. The results suggest implications of bounded rationality for theory and social policy.

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    Paper provided by Princeton University, Department of Economics, Center for Economic Policy Studies. in its series Working Papers with number 1199.

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    Date of creation: Oct 2009
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    Handle: RePEc:pri:cepsud:195spears

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    Keywords: Rationality; price; India;

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    1. Bloch, Francis & Rao, Vijayendra & Desai, Sonalde, 1999. "Wedding Celebrations as Conspicuous Consumption : Signaling Social Status in Rural India," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 1999022, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    2. Jessica Cohen & Pascaline Dupas, 2008. "Free Distribution or Cost-Sharing? Evidence from a Malaria Prevention Experiment," NBER Working Papers 14406, National Bureau of Economic Research, Inc.
    3. Rosenzweig, Mark R. & Stark, Oded, 1987. "Consumption Smoothing, Migration and Marriage: Evidence from Rural India," Bulletins 7515, University of Minnesota, Economic Development Center.
    4. Nava Ashraf & James Berry & Jesse M. Shapiro, 2010. "Can Higher Prices Stimulate Product Use? Evidence from a Field Experiment in Zambia," American Economic Review, American Economic Association, vol. 100(5), pages 2383-2413, December.
    5. Daniel J. Benjamin & Sebastian A. Brown & Jesse M. Shapiro, 2006. "Who is “Behavioral”? Cognitive Ability and Anomalous Preferences," Levine's Working Paper Archive 122247000000001334, David K. Levine.
    6. Easterly, William, 2006. "Planners versus Searchers in Foreign Aid," Asian Development Review, Asian Development Bank, vol. 23(2), pages 1-35.
    7. Kreps, David M., 1990. "Game Theory and Economic Modelling," OUP Catalogue, Oxford University Press, number 9780198283812, September.
    8. Kristina Shampanier & Nina Mazar & Dan Ariely, 2007. "Zero as a Special Price: The True Value of Free Products," Marketing Science, INFORMS, vol. 26(6), pages 742-757, 11-12.
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