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Commitment through risk

Author

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  • Kylymnyuk, Dmytro
  • Wagner, Alexander K.

Abstract

We show that risk-averse hyperbolic-discounting agents can benefit from positive exposure to risk and thus behave as if risk-loving. When the benefits of costly effort are delayed, selecting some risk concerning the outcome of one’s own effort can serve as an intrapersonal commitment device for exerting higher effort, thereby attenuating the negative effect of time-inconsistency. Comparing the effects of time-inconsistency, risk aversion and prudence, we formulate an intuitive condition for risk exposure to be an optimal strategy and discuss several applications of this result.

Suggested Citation

  • Kylymnyuk, Dmytro & Wagner, Alexander K., 2012. "Commitment through risk," Economics Letters, Elsevier, vol. 116(3), pages 295-297.
  • Handle: RePEc:eee:ecolet:v:116:y:2012:i:3:p:295-297
    DOI: 10.1016/j.econlet.2012.03.014
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    References listed on IDEAS

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    More about this item

    Keywords

    Time-inconsistency; Risk aversion; Prudence; Effort provision;

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General

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