Journal
AMERICAN ECONOMIC JOURNAL-MICROECONOMICS
Volume 3, Issue 3, Pages 34-68Publisher
AMER ECONOMIC ASSOC
DOI: 10.1257/mic.3.3.34
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Funding
- Direct For Social, Behav & Economic Scie
- Divn Of Social and Economic Sciences [0851315] Funding Source: National Science Foundation
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We develop a dual-self model of self-control that is compatible with modern dynamic macroeconomic theory and evidence. We show that a convex cost of self-control explains a wide range of behavioral anomalies concerning risk, including the Allais paradox, and also explains the observed interaction between risk and delay. We calibrate the model to obtain a quantitative fit. We find that most of the data can be explained with subjective interest rates in the range of 1-7 percent, short-run relative risk aversion of about two, and a time horizon of one day for the short-run self. (JEL D11, D44, D81)
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