Endogenous Preferences and Dynamic Contract Design
People's past decisions often play a significant role in shaping their future preferences. Based on this premise, we propose a model of endogenously changing preferences in an intertemporal environment. The two types of agents are distinguished by their self-knowledge of the dynamically inconsistent preferences. In particular, we study the dynamic contract design problem of a monopolistic principal in this setup. Commitment contracts and spot contracts are contrasted. When types are known to the principal, commitment contracts are superior to spot arrangements. When types are unobservable, we arrive at several unconventional results. First, the first best outcome can still be achieved in the case of commitment contracts. Second, informational externality may extend in both directions when the first best spot contracts are not incentive compatible. Lastly, in the second best spot contracts, informational rent may accrue to both types of agents.
Volume (Year): 12 (2012)
Issue (Month): 1 (May)
|Contact details of provider:|| Web page: http://www.degruyter.com|
|Order Information:||Web: http://www.degruyter.com/view/j/bejte|
References listed on IDEAS
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.:
- B. Douglas Bernheim & Antonio Rangel, 2004. "Addiction and Cue-Triggered Decision Processes," American Economic Review, American Economic Association, vol. 94(5), pages 1558-1590, December.
- David K. Levine & Drew Fudenberg, 2006.
"A Dual-Self Model of Impulse Control,"
American Economic Review,
American Economic Association, vol. 96(5), pages 1449-1476, December.
- Drew Fudenberg & David K Levine, 2005. "A Dual Self Model of Impulse Control," Levine's Working Paper Archive 618897000000000876, David K. Levine.
- Fudenberg, Drew & Levine, David, 2006. "A Dual-Self Model of Impulse Control," Scholarly Articles 3196335, Harvard University Department of Economics.
- Drew Fudenberg & David K. Levine, 2004. "A Dual Self Model of Impulse Control," Harvard Institute of Economic Research Working Papers 2049, Harvard - Institute of Economic Research.
- Drew Fudenberg & David K. Levine, 2006. "A Dual Self Model of Impulse Control," Harvard Institute of Economic Research Working Papers 2112, Harvard - Institute of Economic Research.
- Mathias Dewatripont & Patrick Bolton, 2005.
ULB Institutional Repository
2013/9543, ULB -- Universite Libre de Bruxelles.
- Gary S. Becker & Kevin M. Murphy, 1986.
"A Theory of Rational Addiction,"
University of Chicago - George G. Stigler Center for Study of Economy and State
41, Chicago - Center for Study of Economy and State.
- Spiegler, Ran, 2011.
"Bounded Rationality and Industrial Organization,"
Oxford University Press, number 9780195398717, December.
- Thaler, Richard H & Shefrin, H M, 1981.
"An Economic Theory of Self-Control,"
Journal of Political Economy,
University of Chicago Press, vol. 89(2), pages 392-406, April.
When requesting a correction, please mention this item's handle: RePEc:bpj:bejtec:v:12:y:2012:i:1:n:19. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Peter Golla)
If references are entirely missing, you can add them using this form.