Temptation and Self-Control in Dynamic Choice

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The choices that individuals make often depend on when they make the decision. Consider a tradeoff between getting a smaller reward in period t and a larger reward in period t+1. In experiments, subjects routinely behave in a dynamically inconsistent fashion when facing such trade-offs: if the decision is made in period t-1 or earlier, the subject opts for the larger, period t+1 reward; by contrast, if the decision is made in period t, the individual opts for the smaller reward that offers immediate consumption instead of choosing to wait until t+1 for the larger reward. Similarly, individuals succumb to tempting but unhealthy consumption more often when the tempting good can be consumed immediately. In this project, which will be undertaken jointly with Faruk Gul of Princeton University, we develop a new choice-theoretic framework to capture this phenomenon. The starting point is a preference relation over sets of alternatives. A set represents a menu of choices for the agent. To capture the idea that agents may be tempted by ex ante undesirable alternatives, we allow preferences to exhibit a desire for commitment, i.e., we allow a strict preference for a smaller set of alternatives. In that framework we identify temptation and self-control as central determinants of behavior. In this work we propose to extend the two-period model that we have already developed to an infinite horizon. The purpose of this extension is to facilitate application of our preferences ("self-control preferences") to a variety of settings, including standard competitive exchange economies. We will explore the implications of self-control preferences for the distribution of income, for the risk premia in stochastic representative agent models, and for the sustainability of debt contracts. In a model of history-dependent preferences, we intend to analyze addiction, a phenomenon closely linked to the lack of self-control. To facilitate comparative statics results, we provide and characterize measures of comparative self-control and comparative preference for commitment.