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Attention-driven demand for bonus contracts

Markus Dertwinkel-Kalt, Mats Köster and Florian Peiseler

No 7539, CESifo Working Paper Series from CESifo

Abstract: In many markets supply contracts include a series of small, regular payments made by consumers and a single, large bonus that consumers receive at some point during the contractual period. But, if for instance its production costs exceed its value to consumers, such a bonus creates inefficiencies. We offer a novel explanation for the frequent occurrence of bonus contracts, which builds on a model of attentional focusing. Our main result identifies market conditions under which bonus contracts should be observed: while a monopolist pays a bonus to consumers - if at all - only for low-value goods, firms standing in competition always - i.e., independent of the consumers’ valuation - offer bonus contracts. Thus, competition does not eliminate but rather exacerbates inefficiencies arising from contracting with focused agents. Common contract schemes in markets for electricity, telephony, and bank accounts are consistent with our model, but cannot be reconciled with alternative approaches such as models on consumption smoothing, (quasi-)hyperbolic discounting, or switching costs.

Keywords: attention; focusing; bonus contracts (search for similar items in EconPapers)
JEL-codes: D91 D18 D40 L10 (search for similar items in EconPapers)
Date: 2019
New Economics Papers: this item is included in nep-cta and nep-mic
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