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Long-term contracting with time-inconsistent agents

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  • Gottlieb, Daniel
  • Zhang, Xingtan

Abstract

We study contracts between naive present-biased consumers and risk-neutral firms. We show that the welfare loss from present bias vanishes as the contracting horizon grows. This is true both when bargaining power is on the consumers’ and on the firms’ side, when consumers cannot commit to long-term contracts, and when firms do not know the consumers’ naiveté. However, the welfare loss from present bias does not vanish when firms do not know the consumers’ present bias or when they cannot offer exclusive contracts.

Suggested Citation

  • Gottlieb, Daniel & Zhang, Xingtan, 2021. "Long-term contracting with time-inconsistent agents," LSE Research Online Documents on Economics 106622, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:106622
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    References listed on IDEAS

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    Cited by:

    1. Cetemen, Doruk & Feng, Felix Zhiyu & Urgun, Can, 2023. "Renegotiation and dynamic inconsistency: Contracting with non-exponential discounting," Journal of Economic Theory, Elsevier, vol. 208(C).
    2. Fahn, Matthias & Seibel, Regina, 2022. "Present bias in the labor market – when it pays to be naive," Games and Economic Behavior, Elsevier, vol. 135(C), pages 144-167.
    3. Camilo Hern'andez & Dylan Possamai, 2023. "Time-inconsistent contract theory," Papers 2303.01601, arXiv.org.
    4. Soheil Ghili & Ben Handel & Igal Hendel & Michael D. Whinston, 2019. "Optimal Long-Term Health Insurance Contracts: Characterization, Computation, and Welfare Effects," Cowles Foundation Discussion Papers 2218R2, Cowles Foundation for Research in Economics, Yale University, revised May 2021.

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    More about this item

    Keywords

    present bias; dynamic inconsistency; regulation; behavioral industrial organization;
    All these keywords.

    JEL classification:

    • J1 - Labor and Demographic Economics - - Demographic Economics

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