Long-Term Contracting with Time-Inconsistent Agents

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.

Consumer Vulnerability and Behavioral Biases

“…To evaluate the welfare of the equilibrium contract c * s , (r * 1s , r * 2s ) , we follow the literature (e.g., DellaVigna and Malmendier, 2004;Rabin, 1999, 2001;Gottlieb and Zhang, 2020) and use the long-run self's utility as the welfare measure. Due to the timing assumption we adopted in this paper, the long-run self's utility is equivalent to period-0 self's utility.…”

Long‐Term Contracting With Time‐Inconsistent Agents

“…Then, Section 4 concludes. Appendices A–E are in the Supplemental Material (Gottlieb and Zhang (2021)); a supplementary appendix may be found at https://personal.lse.ac.uk/gottlied/.…”

Time Consistent Equilibria in Dynamic Models With Recursive Payoffs and Behavioral Discounting

“…See also Becker (2012) and Drugeon and Wigniolle (2020) for related forced by maximally enforced debt limits. Gottleib and Zhang (2020) study the implications of time-inconsistency on the structure of dynamic incentives in a long-term contracting problems between present-bias consumers and risk-neutral firms, and show that firms can offer contracts such that as the length of a contracting problem increases, the welfare-losses associated with present bias disappear. They also explore the role of commitment in supporting this result, all this work done in the setting of a repeated-game.…”