How do consumers choose from a menu of contracts? We analyze a novel dataset
from three U.S. health clubs with information on both the contractual choice and the
day-to-day attendance decisions of 7,752 members over three years. The observed
consumer behavior is difficult to reconcile with standard preferences and beliefs.
First, members who choose a contract with a flat monthly fee of over $70 attend on
average 4.3 times per month. They pay a price per expected visit of more than $17,
even though they could pay $10 per visit using a 10-visit pass. On average, these
users forgo savings of $600 during their membership. Second, consumers who
choose a monthly contract are 17 percent more likely to stay enrolled beyond one
year than users committing for a year. This is surprising because monthly members
pay higher fees for the option to cancel each month. We also document cancellation
delays and attendance expectations, among other findings. Leading explanations for
our findings are overconfidence about future self-control or about future efficiency.
Overconfident agents overestimate attendance as well as the cancellation probability
of automatically renewed contracts. Our results suggest that making inferences
from observed contract choice under the rational expectation hypothesis can
lead to biases in the estimation of consumer preferences. (JEL D00, D12, D91)
DellaVigna, Stefano, and Ulrike Malmendier.
2006."Paying Not to Go to the Gym."American Economic Review,