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Endogenous Preferences and Dynamic Contract Design
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Wei Zhang
Published/Copyright:
May 28, 2012
People's past decisions often play a significant role in shaping their future preferences. Based on this premise, we propose a model of endogenously changing preferences in an intertemporal environment. The two types of agents are distinguished by their self-knowledge of the dynamically inconsistent preferences. In particular, we study the dynamic contract design problem of a monopolistic principal in this setup. Commitment contracts and spot contracts are contrasted. When types are known to the principal, commitment contracts are superior to spot arrangements. When types are unobservable, we arrive at several unconventional results. First, the first best outcome can still be achieved in the case of commitment contracts. Second, informational externality may extend in both directions when the first best spot contracts are not incentive compatible. Lastly, in the second best spot contracts, informational rent may accrue to both types of agents.
Keywords: endogenous preferences; self-control; dynamic contract design; commitment; endogenous toughening effect; endogenous softening effect
Published Online: 2012-5-28
©2012 Walter de Gruyter GmbH & Co. KG, Berlin/Boston
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Keywords for this article
endogenous preferences;
self-control;
dynamic contract design;
commitment;
endogenous toughening effect;
endogenous softening effect
Articles in the same Issue
- Advances Article
- Seller Cheap Talk in Almost Common Value Auction
- Strategic Effects of Renegotiation-Proof Contracts
- Contributions Article
- Uniquely Representing "A Preference for Uniformity"
- An Experimental Comparison of Sequential First- and Second-Price Auctions with Synergies
- Transparency, Career Concerns, and Incentives for Acquiring Expertise
- Career Concerns and Performance Reporting in Optimal Incentive Contracts
- Two Notes on the Blotto Game
- The Tennis Coach Problem: A Game-Theoretic and Experimental Study
- Multidimensional Product Differentiation with Discrete Characteristics
- Screening and Financial Contracting in the Face of Outside Competition
- On Rationalizability and Beliefs in Discrete Private-Value First-Price Auctions
- Commitment versus Flexibility in Enforcement Games
- Endogenous Preferences and Dynamic Contract Design
- Intergenerational Interactions in Human Capital Accumulation
- Behavior-Based Price Discrimination by a Patient Seller
- Altruism and Local Interaction
- Education Signaling with Uncertain Returns
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- An Axiomatization of Learning Rules when Counterfactuals are not Observed
- On a Notion of Similarity with Endowments in Public Economics
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