Model-based evaluation of cooling-off policies

Christian Michel and Andre Stenzel

Games and Economic Behavior, 2021, vol. 129, issue C, 270-293

Abstract: This paper studies the ex-ante prediction and ex-post evaluation of the effects of cooling-off policies when consumers may exhibit a projection bias. We set up a theoretical model in which a firm optimally reacts to consumers' preferences and the regulatory framework and show that neither the adoption of a mandatory cooling-off period nor a return policy is generically superior or consumer welfare improving. We then analyze how market-level data can help to evaluate the policies ex post using baseline statistics. This exploits the firm's optimal response to a policy. With a return policy, data on quantities, return frequencies, and market size are sufficient to always assess the directional change in consumer welfare, while aggregate quantities alone are sufficient with a mandatory cooling off period. We discuss robustness of the model predictions and ex-post assessment to a variety of modifications, and discuss the benefits of the approach for policy design.

Keywords: Cooling-off; Equilibrium-based inference; Identification of nonstandard preferences; Projection bias; Behavioral economics (search for similar items in EconPapers)
JEL-codes: D04 D18 D90 (search for similar items in EconPapers)
Date: 2021
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Related works:
Working Paper: Policy Evaluation in Behavioral Models (2018)
Working Paper: Model-Based Evaluation of Cooling-off Policies (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:gamebe:v:129:y:2021:i:c:p:270-293

DOI: 10.1016/j.geb.2021.05.012

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