New York City Cab Drivers' Labor Supply Revisited: Reference-Dependent Preferences with Rational-Expectations Targets for Hours and Income

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Abstract: We propose a theory of inefficient renegotiation that is based on loss aversion. When two parties write a long-term contract that has to be renegotiated after the realization of the state of the world, they take the initial contract as a reference point to which they compare gains and losses of the renegotiated transaction. We show that loss aversion makes the renegotiated outcome sticky and materially inefficient. The theory has important implications for the optimal design of long-term contracts. First, it explains why parties often abstain from writing a beneficial long-term contract or why some contracts specify transactions that are never ex post efficient. Second, it shows under what conditions parties should rely on the allocation of ownership rights to protect relationship-specific investments rather than writing a specific performance contract. Third, it shows that employment contracts can be strictly optimal even if parties are free to renegotiate. Terms of use: Documents in EconStor mayJEL classification numbers: C78; D03; D86.

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“…For more recent applications of constant additive loss aversion see e.g. Crawford and Meng (2011) and Ericson and Fuster (2011).…”

Section: The Modelmentioning

confidence: 99%

Loss Aversion and Inefficient Renegotiation

Herweg

Schmidt

2014

The Review of Economic Studies

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“…Evidence for reference points being (at least partially) shaped by expectations is found in both laboratory data (Abeler et al, 2011;Ericson and Fuster, 2011;Gill and Prowse, 2012;Karle et al, 2012;Banerji and Gupta, 2014) as well as field data (Crawford and Meng, 2011;Bartling et al, 2013). Beginning with Heidhues and Kőszegi (2008), expectationbased loss aversion à la Kőszegi andRabin (2006, 2007) is applied to models of industrial organization (Heidhues and Kőszegi, 2014;Herweg and Mierendorff, 2013;Karle and Peitz, forthcoming;Karle, 2013;Rosato, 2013), contract design (Herweg et al, 2010;Macera, 2011;Daido and Murooka, 2013;Daido et al, 2013), mechanism design (Eisenhuth, 2012;Hahn et al, 2012), and inventory management (Herweg, 2013).…”

Section: Introductionmentioning

confidence: 93%

Incomplete Contracting, Renegotiation, and Expectation-Based Loss Aversion

2016

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We consider a simple trading relationship between an expectation-based loss-averse buyer and profit-maximizing sellers. When writing a long-term contract the parties have to rely on renegotiations in order to ensure materially efficient trade ex post. The type of the concluded long-term contract affects the buyer's expectations regarding the outcome of renegotiation. If the buyer expects renegotiation always to take place, the parties are always able to implement the materially efficient good ex post. It can be optimal for the buyer, however, to expect that renegotiation does not take place. In this case, a good of too high quality or too low quality is traded ex post. Based on the buyer's expectation management, our theory provides a rationale for "employment contracts" in the absence of non-contractible investments. Moreover, in an extension with non-contractible investments, we show that loss aversion can reduce the hold-up problem.JEL classification: C78; D03; D86

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“…For example, if he had been expecting to buy good 1 for $15, then buying good 2 for $10 feels like a loss of v 1 v 2 on the quality dimension and a gain of $5 on the money dimension. 21 Similarly, if a consumer had been expecting to buy good 1 for either $10 or $20, then paying $15 for it feels like a loss of $5 relative to the possibility of paying $10, and like a gain of $5 relative to the possibility of paying $20. In addition, the weight on the loss (gain) in the overall experience is equal to the probability with which he had been expecting to pay $10 ($20).…”

Section: Environmentmentioning

confidence: 99%

Selling substitute goods to loss‐averse consumers: limited availability, bargains, and rip‐offs

Rosato

2016

The RAND J of Economics

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Why are some sale items subject to limited availability while other substitute items are available in large quantities and are priced relatively high at the same point in time? Can such a retail strategy lure consumers into purchasing the more expensive item? This paper characterizes the pro…t-maximizing pricing and product-availability strategies for a retailer selling two substitute goods to loss-averse consumers and shows that limited-availability sales can manipulate consumers into an ex-ante unfavorable purchase. Consumers have unit demand, are interested in buying only one good, and their reference point is given by their recent rational expectations about what consumption value they would receive and what price they would pay. The seller maximizes pro…ts by raising the consumers'reference point through a tempting discount on a good available only in limited supply (the bargain) and cashing in with a high price on the other good (the rip-o¤), which the consumers buy if the bargain is not available to minimize their disappointment. The seller might prefer to o¤er a deal on the more valuable product, using it as a bait, because consumers feel a larger loss, in terms of forgone consumption, if this item is not available. I also show that the bargain item can be a loss leader, that the seller's product line is not welfare-maximizing and that she might supply a socially wasteful product. The model suggests that the current FTC Guides Against Bait Advertising, by allowing retailers to employ limited-availability sales, could reduce consumer and social welfare.JEL classi…cation: D11; D42; L11.

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New York City Cab Drivers' Labor Supply Revisited: Reference-Dependent Preferences with Rational-Expectations Targets for Hours and Income

Cited by 411 publications

References 14 publications

Loss Aversion and Inefficient Renegotiation

Loss Aversion and Inefficient Renegotiation

Incomplete Contracting, Renegotiation, and Expectation-Based Loss Aversion

Selling substitute goods to loss‐averse consumers: limited availability, bargains, and rip‐offs

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