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Rebate or Bait? A Model of Regret and Time Inconsistency in Consumer Behaviour

  • Drago, Francesco
  • Kadar, Dora

In this paper we develop a theory of time-inconsistency and regret that is motivated by evidence on a 'price discrimination' technique widespread in the United States, namely mail-in-rebate promotions. Our model combines partial naivete about future self-control problems and the sunk-cost effect (regret). We assume that agents deviating from their past choices suffer a certain emotional disutility from having brought a bad decision in the past and that this emotional disutility is negatively related to the length of the period between the choice made and the deviation from it. In the context of our application the model explains why in a multi period setting a large number of consumers respond to the rebate offers intending to redeem the rebate and then fail to provide the necessary effort when it comes to collect their money. Moreover, consumer failure to accomplish a task planned in the past (e.g. redeeming the rebate) is more likely when the deadline of completion is longer. This prediction is supported by experimental studies on various forms of procrastination and by field and experimental evidence on mail-in-rebates. We review a number of areas for which the theory may have important implications.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5757.

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Date of creation: Jul 2006
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Handle: RePEc:cpr:ceprdp:5757
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  1. Brigitte C. Madrian & Dennis F. Shea, 2001. "THE POWER OF SUGGESTION: INERTIA IN 401(k) PARTICIPATION AND SAVINGS BEHAVIOR," The Quarterly Journal of Economics, MIT Press, vol. 116(4), pages 1149-1187, November.
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  9. Laibson, David, 1997. "Golden Eggs and Hyperbolic Discounting," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 443-77, May.
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  12. Stefano DellaVigna & Ulrike Malmendier, 2006. "Paying Not to Go to the Gym," American Economic Review, American Economic Association, vol. 96(3), pages 694-719, June.
  13. Loomes, Graham & Sugden, Robert, 1987. "Some implications of a more general form of regret theory," Journal of Economic Theory, Elsevier, vol. 41(2), pages 270-287, April.
  14. Oster Sharon M. & Scott Morton Fiona M., 2005. "Behavioral Biases Meet the Market: The Case of Magazine Subscription Prices," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 5(1), pages 1-32, March.
  15. Klaus Wertenbroch, 1998. "Consumption Self-Control by Rationing Purchase Quantities of Virtue and Vice," Marketing Science, INFORMS, vol. 17(4), pages 317-337.
  16. Loomes, Graham & Sugden, Robert, 1983. "A Rationale for Preference Reversal," American Economic Review, American Economic Association, vol. 73(3), pages 428-32, June.
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