EconPapers    
Economics at your fingertips  
 

Attention-driven demand for bonus contracts

Markus Dertwinkel-Kalt (), Mats Köster and Florian Peiseler

No 304, DICE Discussion Papers from University of Düsseldorf, Düsseldorf Institute for Competition Economics (DICE)

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)
New Economics Papers: this item is included in nep-cta, nep-mic and nep-ore
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
https://www.econstor.eu/bitstream/10419/183492/1/1037039300.pdf (application/pdf)

Related works:
Journal Article: Attention-driven demand for bonus contracts (2019) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:zbw:dicedp:304

Access Statistics for this paper

More papers in DICE Discussion Papers from University of Düsseldorf, Düsseldorf Institute for Competition Economics (DICE) Contact information at EDIRC.
Bibliographic data for series maintained by ZBW - Leibniz Information Centre for Economics ().

 
Page updated 2019-10-01
Handle: RePEc:zbw:dicedp:304