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Bounded Rationality as Deliberation Costs: Theory and Evidence from a Pricing Field Experiment in India

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  • Dean E. Spears

    (Princeton University)

Abstract

How might bounded rationality shape decisions to spend? A field experiment verifies a theory of bounded rationality as deliberation costs that can explain findings from previous experiments on pricing in developing countries. The model predicts that (1) eliminating deliberation costs will increase purchasing at a higher price without impacting behavior at a lower price, (2) bounded rationality has certain greater effects on poorer people, and (3) deliberation costs can suppress screening by prices. Each prediction is confirmed by an experiment that sold soap in rural Indian villages. The experiment interacted assignment to different subsidized prices with a treatment that eliminated marginal deliberation costs. The results suggest implications of bounded rationality for theory and social policy.

Suggested Citation

  • Dean E. Spears, 2009. "Bounded Rationality as Deliberation Costs: Theory and Evidence from a Pricing Field Experiment in India," Working Papers 1199, Princeton University, Department of Economics, Center for Economic Policy Studies..
    • Handle: RePEc:pri:cepsud:195
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    More about this item

    Keywords

    Rationality; price; India;
    All these keywords.

    JEL classification:

    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • D19 - Microeconomics - - Household Behavior - - - Other
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • C93 - Mathematical and Quantitative Methods - - Design of Experiments - - - Field Experiments

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