Abstract Though economists assume that intertemporal preferences are time-consistent, evidence suggests that a person's relative preference for well-being at an earlier moment over a later moment increases as the earlier moment gets closer. That is, many people have a self-control problem, and moment-by-moment we pursue immediate gratification more than we ourselves wish we would. This proposa1 attempts to develop formal economic models of such psychologically realistic time-inconsistent preferences, building from and expanding on earlier models. In the simplest model, a person must engage in an activity exactly once during some number of periods, choosing at each moment whether to do it now or do it later. Results in this model depend on two distinctions. First, do choices involve salient costs - where the costs of an action are immediate but any rewards are delayed - or do they involve salient rewards - where the rewards of an action are immediate but any costs are delayed? Second, are people sophisticated - they foresee future self-control problems - or are they naive - they do not anticipate these self-control problems? Some simple results are derived. Naive people procrastinate activities with salient costs and preproperate - do too soon - activities with salient rewards. If costs are salient, sophistication mitigates procrastination, and can even lead people to do the activity sooner than if they had no self-control problem. If rewards are salient, sophistication exacerbates preproperation. These behavioral results have corresponding welfare implications: With salient costs, mild self-control problems can severely damage a person only if she is naive, while with salient rewards mild self-control problems can severely damage a person only if she is sophisticated. The investigator and his co-author apply the insights of the one-activity model to different economic appli cations. In one project, they analyze optimal incentives for naive procrastinators. The findings indicate two major lessons. First, incentives designed to induce efficient behavior will in general be `steeper` than if agents were not procrastinators - agents will be punished for delay in completing a task more harshly than corresponds to the true cost of delay. Second, when there is uncertainty about the exact propensity of agents to procrastinate, then even in environments where the true cost of delay is `stationary`, `deadline` incentive schemes may be used to max imize efficiency: The agent will at first be punished mildly or not at all for delay, but then after some date be punished severely for delay. Such incentives encourage those with little propensity to procrastinate to wait until it is efficient to do the task (i.e., not do the task right away if it turns out to be too costly), while assuring that those with a severe propensity to procrastinate do not delay too long. The investigator's major project is the study of the role of self-control problems in the consumption of addictive goods. Some recent theoretical and empirical research by economists has been innovative in understanding the crux of addictive goods: While consuming goods (e.g., smoking cigarettes) may be harmful to a person's wellbeing, higher past consumption of those goods increases a person's marginal utility of consuming the good, so that the person may maintain or increase her consumption of the good over time while doing more and more harm to herself. These models, however, use a rational-choice framework, where people are assumed to have both time-consistent preferences and correct expectations about their future behavior. This project concerns the implications of a self-control problem and varied assumptions about sophistication for people with the same underlying preferences for addictive goods as in these rational-choice models. Results pertain to the role that sophistication plays in the propensity to get addicted to goods. If an addiction is irreversible - every time a person takes a `hit` of an addictive good, she knows it will forever increase her craving for that good - a person who is sophisticated about her self-control problem will be more likely than a person who is naive to become addicted. Na?vet? makes you more willing to resist temptation now, because you (naively) believe that the consequences of indulging now will be that you will 1ive the rest of your life with a craving you won't fulfill. If you are sophisticated, and hence realize it is likely you will get addicted, you will be more likely to cave in to a craving - because you realize the only cost is that you will get addicted a bit sooner. The logic is very different for the (more realistic) case where refraining from an addictive activity will help a person become unhooked. The investigator conjectures that people who are naive about their self-control problem will consume a lot of an addictive product - and become and stay addicted - under the naive belief that they will quit tomorrow. The investigator also plans to pursue many other projects that incorporate greater psychological realism into eco nomics.
