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Imperfect Memory and the Preference for Increasing Payments

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  • John Smith

Abstract

We show how imperfect memory can imply a preference for increasing payments. We model an agent making a decision regarding effort in two periods. Before the first decision, the agent receives a signal related to the cost of effort, which is subsequently forgotten. Before the second decision, the agent makes an inference regarding the signal based on the publicly available information: the action taken and the wage paid. A preference for increasing payments naturally emerges. We show that this preference will only occur when the wage payments are neither very likely nor very unlikely to cover the cost of effort.

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  • John Smith, 2009. "Imperfect Memory and the Preference for Increasing Payments," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 165(4), pages 684-700, December.
    • Handle: RePEc:mhr:jinste:urn:sici:0932-4569(200912)165:4_684:imatpf_2.0.tx_2-a
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    Cited by:

    1. Giovanni Immordino & Anna Maria C. Menichini & Maria Grazia Romano, 2015. "Contracts with Wishful Thinkers," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 24(4), pages 863-886, October.
    2. repec:cup:judgdm:v:8:y:2013:i:1:p:74-90 is not listed on IDEAS
    3. Duffy, Sean & Smith, John, 2013. "Preference for increasing wages: How do people value various streams of income?," Judgment and Decision Making, Cambridge University Press, vol. 8(1), pages 74-90, January.
    4. Duffy, Sean & Smith, John & Woods, Kristin, 2015. "How does the preference for increasing payments depend on the size and source of the payments?," MPRA Paper 64212, University Library of Munich, Germany.

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    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General

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