Dynamically Inconsistent Preferences I: Unconstrained Contracting

Spiegler Ran

in Bounded Rationality and Industrial Organization

Published in print February 2011 | ISBN: 9780195398717
Published online September 2011 | e-ISBN: 9780199896790 | DOI:
Dynamically Inconsistent Preferences I: Unconstrained Contracting

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This chapter analyzes monopoly and competitive pricing when consumers have limited self-control. It introduces the multi-selves model for analyzing the behavior of consumers with dynamically inconsistent preferences, as well as the distinction between sophistication and naivety in the anticipation of future tastes. The chapter discusses the problem of screening consumer sophistication: firms offer perfect commitment devices to sophisticated consumers and exploitative, speculative contracts to naïve consumers. The model is applied to illuminate phenomena such as credit card teaser rates and negative option offers.

Keywords: dynamically inconsistent preferences; self-control; multi-selves model; sophistication; naivety; screening; exploitative contracts; speculative trade; commitment devices; teaser rates; negative option offers; monopoly; competition

Chapter.  8856 words.  Illustrated.

Subjects: Economics

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