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Dynamic Optimization and Conformity in Health Behavior and Life Enjoyment over the Life Cycle

Hernan Bejarano (), Hillard Kaplan and Stephen Rassenti

Working Papers from Chapman University, Economic Science Institute

Abstract: This article examines individual and social influences on investments in health and enjoyment from immediate consumption. We report the results of a lab experiment that mimics the problem of health investment over a lifetime, building on Grossman’s (1972a, 1972b) theoretical framework. Subjects earn money through the experiment in proportion to the sum of the life enjoyment they have consumed. However, income in each period is a function of previous health investments, so there is a dynamic optimum for maximizing earnings through the appropriate expenditures on life enjoyment and health in each period. In order to model social effects in the experiment, we randomly assigned individuals to chat/observation groups, composed of four subjects each. Two treatments were employed: In the Independent treatment, an individual’s rewards from investments in life enjoyment depend only on his choice and in the Interdependent treatment, rewards not only depend on an individual’s choices but also on their similarity to the choices of the others in their group. Seven predictions were tested and each was supported by the data. We found: 1) Subjects engaged in helpful chat in both treatments; 2) there was significant heterogeneity among both subjects and groups in chat frequencies; and 3) chat was most common early in the experiment. The interdependent treatment 4) increased strategic chat frequency, 5) decreased within-group variance, 6) increased between-group variance, and 7) increased the likelihood of behavior far from the optimum with respect to the dynamic problem. Individual incentives explain a large part, but not all, of the variance in prosocial behavior in the form of strategic advice. Incentives for conformity appear to promote prosocial behavior, but also increase variance among groups in equilibrium outcomes, leading to convergence on suboptimal strategies for some groups

Keywords: experimental economics; behavioral economics; health economics; dynamic programming (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-exp, nep-hea and nep-ltv
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