Experimental Studies of Time Inconsistent Preferences for Risk, Fairness, and Charitable Giving

University Of California-San Diego, La Jolla CA

Investigators

Abstract

Abstract Future commitments that are not followed through, referred to as time-inconsistent choices (TICs), are considered the result of temptation to indulge in immediately satisfying activities. These activities lead to inefficient decisions, such as low savings, and the way to overcome TICs is to design contracts that force people to "commit" to their plans. This proposal looks at a new breed of TICs that people often do not want to commit to avoiding. Unlike usual TICs, this research will study temptations that are social rather than private. A large component of acting fairly or generously is the result of social pressures to give or to appear generous. These social pressures are felt at the time of the decision to give, while the joy of giving is not felt until the actual gift is transacted. People may be tempted to promise to give because of the social pressure to appear generous but may not follow through when the time comes to give. This TIC need not be cured by commitment plans, but by giving people the flexibility to break with their plans. This research will study how one can tell which cause of TIC is at work, and how best to improve people's outcomes. Understanding this new breed of TICs will lead to better decisions, such as increased savings, investment in education, and policy formulation, thus improving the living standards of U.S. citizens and the competitiveness of the U.S. economy. The literature on TICs assumes that plans for the future are made free from present bias which can only be overcome by commitment plans. The idea behind this research is that the same behavior?stating and breaking a plan?can come from two equally natural and intuitive models, but one is best cured by commitment while the other requires flexibility. Besides the usual TICs resulting from "present bias", some people make commitment for the future they do not intend to follow through because of social pressure. Efficient policy to deal with this type of time inconsistent choice is to allow for flexibility to opt out of the commitment. This research will develop models and conduct experiments to distinguish between the two sources of TICs. The ideas developed will be applied to several areas, such as charitable giving and notions of fairness and justice, where social pressures are important. The research will use a combination of laboratory and field experiments, and economic theory to develop hypotheses and tests. The results of this research will help us better understand the issues of time-inconsistent choices and help provide better contract design to improve social outcomes. The results are also applicable to several areas of economics and other social sciences.