Imperfect Memory and the Preference for Increasing Payments
AbstractIn this paper we show how imperfect memory can imply a preference for increasing payments. We model an agent making a decision regarding effort in two periods where the cost of effort is imperfectly known. Before making 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 content of this signal based on the publicly available information: the action taken and the wage paid. A preference for increasing payments naturally emerges from our model. With the auxiliary assumption that obtaining wage income requires an unknown cost of effort and obtaining rental income requires a known, zero cost of effort, our results provide an explanation for the experimental findings of Loewenstein and Sicherman (1991). These authors find evidence of a stronger preference for increasing "income from wages" rather than "income from rent." Additionally, our model makes the novel prediction that this preference for increasing payments will only occur when the contracts are neither very likely nor very unlikely to cover the cost of effort.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Rutgers University, Department of Economics in its series Departmental Working Papers with number 200805.
Length: 20 pages
Date of creation: 08 Aug 2008
Date of revision:
Contact details of provider:
Postal: New Jersey Hall - 75 Hamilton Street, New Brunswick, NJ 08901-1248
Phone: (732) 932-7482
Fax: (732) 932-7416
Web page: http://snde.rutgers.edu/Rutgers/wp/rutgers-wplist.html
More information through EDIRC
imperfect recall; Self-Perception Theory; sequences of payments;
Other versions of this item:
- John Smith, 2009. "Imperfect Memory and the Preference for Increasing Payments," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 165(4), pages 684-700, December.
- D8 - Microeconomics - - Information, Knowledge, and Uncertainty
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Grund, Christian & Sliwka, Dirk, 2005.
"Reference Dependent Preferences and the Impact of Wage Increases on Job Satisfaction: Theory and Evidence,"
IZA Discussion Papers
1879, Institute for the Study of Labor (IZA).
- Christian Grund & Dirk Sliwka, 2007. "Reference-Dependent Preferences and the Impact of Wage Increases on Job Satisfaction: Theory and Evidence," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 163(2), pages 313-335, June.
- Gary Gigliotti & Barry Sopher, 1996.
"Violations of Present-value Maximization in Income Choice,"
Departmental Working Papers
199624, Rutgers University, Department of Economics.
- Gary Gigliotti & Barry Sopher, 1997. "Violations of Present-Value Maximization in Income Choice," Theory and Decision, Springer, vol. 43(1), pages 45-69, July.
- Rubinstein, Ariel, 1995.
"On the Interpretation of Decision Problems with Imperfect Recall,"
Mathematical Social Sciences,
Elsevier, vol. 30(3), pages 324-324, December.
- Piccione, Michele & Rubinstein, Ariel, 1997. "On the Interpretation of Decision Problems with Imperfect Recall," Games and Economic Behavior, Elsevier, vol. 20(1), pages 3-24, July.
- David Hirshleifer & Ivo Welch, 2001.
"An Economic Approach to the Psychology of Change: Amnesia, Inertia, and Impulsiveness,"
Cowles Foundation Discussion Papers
1306, Cowles Foundation for Research in Economics, Yale University.
- David Hirshleifer & Ivo Welch, 2002. "An Economic Approach to the Psychology of Change: Amnesia, Inertia, and Impulsiveness," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 11(3), pages 379-421, 09.
- 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.
- Benabou, R. & Tirole, J., 2001.
"Willpower and Personal Rules,"
216, Princeton, Woodrow Wilson School - Public and International Affairs.
- 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.
- 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).
- Paola Manzini & Marco Mariotti & Luigi Mittone, 2010. "Choosing monetary sequences: theory and experimental evidence," Theory and Decision, Springer, vol. 69(3), pages 327-354, September.
- Paola Manzini & Marco Mariotti & Luigi Mittone, 2006. "Choosing Monetary Sequences: Theory and Experimental Evidence," CEEL Working Papers 0601, Cognitive and Experimental Economics Laboratory, Department of Economics, University of Trento, Italia.
- Paola Manzini & Marco Mariotti & Luigi Mittone, 2006. "Choosing Monetary Sequences: Theory and Experimental Evidence," Working Papers 562, Queen Mary, University of London, School of Economics and Finance.
- B. Douglas Bernheim & Raphael Thomadsen, 2005. "Memory and Anticipation," Economic Journal, Royal Economic Society, vol. 115(503), pages 271-304, 04.
- Otto H. Swank, 2006. "The Self-Perception Theory vs. a Dynamic Learning Model," Tinbergen Institute Discussion Papers 06-092/1, Tinbergen Institute.
- Roland Benabou & Jean Tirole, 2003.
"Intrinsic and Extrinsic Motivation,"
Review of Economic Studies,
Wiley Blackwell, vol. 70(3), pages 489-520, 07.
- Gary Gigliotti & Barry Sopher, 1998. "Analysis of Intertemporal Choice: A New Framework and Experimental Results," Departmental Working Papers 199804, Rutgers University, Department of Economics.
- Dow, James, 1991. "Search Decisions with Limited Memory," Review of Economic Studies, Wiley Blackwell, vol. 58(1), pages 1-14, January.
- Clark, Andrew E., 1999. "Are wages habit-forming? evidence from micro data," Journal of Economic Behavior & Organization, Elsevier, vol. 39(2), pages 179-200, June.
- Duffy, Sean & Smith, John, 2010.
"Preference for increasing wages: How do people value various streams of income?,"
23559, University Library of Munich, Germany.
- 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.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.