Commitment through risk

Dmytro Kylymnyuk and Alexander Wagner

Economics Letters, 2012, vol. 116, issue 3, 295-297

Abstract: We show that risk-averse hyperbolic-discounting agents can benefit from positive exposure to risk and thus behave as if risk-loving. When the benefits of costly effort are delayed, selecting some risk concerning the outcome of one’s own effort can serve as an intrapersonal commitment device for exerting higher effort, thereby attenuating the negative effect of time-inconsistency. Comparing the effects of time-inconsistency, risk aversion and prudence, we formulate an intuitive condition for risk exposure to be an optimal strategy and discuss several applications of this result.

Keywords: Time-inconsistency; Risk aversion; Prudence; Effort provision (search for similar items in EconPapers)
JEL-codes: D81 D90 (search for similar items in EconPapers)
Date: 2012
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:116:y:2012:i:3:p:295-297

DOI: 10.1016/j.econlet.2012.03.014

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