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American Economic Journal: Microeconomics: Vol. 3 No. 3 (August 2011)

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Risk, Delay, and Convex Self-Control Costs

Article Citation

Fudenberg, Drew, and David K. Levine. 2011. "Risk, Delay, and Convex Self-Control Costs." American Economic Journal: Microeconomics, 3(3): 34-68.

DOI: 10.1257/mic.3.3.34

Abstract

We develop a dual-self model of self-control that is compatible with modern dynamic macroeconomic theory and evidence. We show that a convex cost of self-control explains a wide range of behavioral anomalies concerning risk, including the Allais paradox, and also explains the observed interaction between risk and delay. We calibrate the model to obtain a quantitative fit. We find that most of the data can be explained with subjective interest rates in the range of 1-7 percent, short-run relative risk aversion of about two, and a time horizon of one day for the short-run self. (JEL D11, D44, D81)

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Authors

Fudenberg, Drew (Harvard U)
Levine, David K. (Washington U in St Louis)

JEL Classifications

D11: Consumer Economics: Theory
D44: Auctions
D81: Criteria for Decision-Making under Risk and Uncertainty

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