Theory Seminar "Fudenberg and Levine"

Original article (link) posted: 08/10/2005

Fudenberg and Levine (2005) "A Dual Self Model of Impulse Control"

The paper proposes a "dual-self" model for a single agent decision making. In their model, the patient long-run self and a sequence of myopic short-run selves who share the same preferences over the stage-game outcome play games to decide some dynamic decision. In each period, the long-run self moves first and chooses the utility function of the myopic self possibly with some reduction in utility ("self-control"). After seeing this "self-control" level, the short-run player takes the final decision.
The model gives a unified explanation for a number of empirical regularities related to self-control problems and a value for commitment in decision problems, including the apparent time-inconsistency that has motivated models of hyperbolic discounting and Rabin's paradox of risk aversion in the large and small. The base version of the model is consistent with Gul-Pesendorfer axioms.

The paper is quite interesting and the presentation by Professor Levine was really nice. He illustrated many experimental results and explain how their theory can explain them. However, it was bit unclear for me to see their marginal contribution in the literature of behavioral Economics. It seems that there are many alternative theories which can also explain those experimental results. I must check the papers in this field at least to some extent...

Interesting Papers on Reference

Gul and Pesendorfer (2001) "Temptation and Self-Control" Econometrica, 69
: An axiomatic approach of temptation preference
Gul and Pesendorfer (2004) "Self-Control and the Theory of Consumption" Econometrica, 72
: Generalization of the 2001 paper with multi-period decision aiming for the application to macro economics
Krusell and Smith (2003) "Consumption-Savings Decisions with Quasi-Geometric Discounting" Econometrica, 71
: Multiple equilibria in hyperbolic models
Laibson (1997) "Golden eggs and hyperbolic discounting" QJE, 112
: Revival of non-exponential discounting preference
Laibson (2001) "A Cue-Theory of Consumption" QJE, 116
: Cue-theory
O'Donogue and Rabin (1999) "Doing It Now or Latter" AER, 89
: Early or latter decision
Rabin (2000) "Risk Aversion and Expected-Utility Theory: A Calibration Theorem" Econometrica
: Rabin's paradox
Thaler and Shefin (1981) "An Economic Theory of Self-Control" JPE, 89
: A pioneering work of self-control

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