Abstract
Standard economic models assume preferences are fixed. This paper considers behaviour when preferences are affected by consumer decisions. I introduce agents whose value of future consumption—their present bias—is affected by how much they consume. The more they indulge, the more tempted they are to indulge. I find that differences in preferences and future expectations can trap agents in divergent paths of self-improvement—saving more, they value the future more, making saving optimal—or binging—consuming more makes them indifferent to future costs, making consumption optimal. Behaviour can thus be self-reinforcing. At an extreme, it is frequently an optimum for a consumer to consume their entire wealth. If consumers anticipate future negative shocks, such as poverty or drug addiction, they may also consume more today in order to become oblivious to those future costs, making commitment devices valuable.
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Notes
I focus on the case where reducing consumption increases \(\gamma \) (reduces present bias). The opposite is plausibly the case in the short run: there, willpower has been observed to be a finite resource, and so resisting one temptation might make another harder to resist. Such depletion effects appear to be limited to the short run, however, and they also appear to depend on the beliefs of the consumer (Job et al. 2010).
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It is with great thanks I acknowledge the comments and guidance of Kevin Roberts in the writing of this paper, as well as the helpful advice of Margaret Meyer, Claudia Herresthal, Felix Pretis, Alan Beggs, Robin Cubitt, and conference participants at ASSET 2014 and CEA 2014 as well as various seminar presentations and other conferences. The Clarendon Fund and the Social Sciences and Humanities Research Council of Canada kindly provided financial support.
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Chesterley, N. Virtue and vice with endogenous preferences. Econ Theory Bull 4, 199–211 (2016). https://doi.org/10.1007/s40505-015-0078-4
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DOI: https://doi.org/10.1007/s40505-015-0078-4