DP12354 Willpower and Compromise Effect

Author(s): Yusufcan Masatlioglu, Daisuke Nakajima, Emre Ozdenoren
Publication Date: October 2017
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Programme Areas: Industrial Organization
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=12354

This paper provides a behavioral foundation for the willpower as limited cognitive resource model which bridges the standard utility maximization and the Strotz models. Using the agent's ex ante preferences and ex post choices, we derive a representation that captures key behavioral traits of willpower constrained decision making. We use the model to study the pricing problem of a profit maximizing monopolist who faces consumers with limited willpower. We show that the optimal contract often consists of three alternatives and the consumer's choices reflect a form of the "compromise effect" which is induced endogenously.