Risk, Delay, and Convex Self-Control Costs

Drew Fudenberg and David Levine

American Economic Journal: Microeconomics, 2011, vol. 3, issue 3, 34-68

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)

JEL-codes: D11 D44 D81 (search for similar items in EconPapers)
Date: 2011
Note: DOI: 10.1257/mic.3.3.34
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Citations: View citations in EconPapers (30)

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Working Paper: Risk, Delay, and Convex Self-Control Costs (2009)
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