September 22, 2020, 17:00–18:30
Economic Theory Seminar
We study contracts between naive present-biased consumers and risk-neutral firms. Our main result is that the welfare loss from present bias vanishes as the contracting horizon grows. This is true both when the 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 their naiveté. However, when firms do not know the consumers’ present bias, they offer menus of contracts with insufficient savings to all but the most time-consistent type, and this informational inefficiency persists as the contracting horizon grows. Moreover, if firms cannot offer exclusive contracts, no commitment device is offered, so the inefficiency also does not vanish as the horizon grows.