Working Paper: CEPR ID: DP5757
Authors: Francesco Drago; Dora Kadar
Abstract: In this paper we develop a theory of time-inconsistency and regret that is motivated by evidence on a 'price discrimination' technique widespread in the United States, namely mail-in-rebate promotions. Our model combines partial naivete about future self-control problems and the sunk-cost effect (regret). We assume that agents deviating from their past choices suffer a certain emotional disutility from having brought a bad decision in the past and that this emotional disutility is negatively related to the length of the period between the choice made and the deviation from it. In the context of our application the model explains why in a multi period setting a large number of consumers respond to the rebate offers intending to redeem the rebate and then fail to provide the necessary effort when it comes to collect their money. Moreover, consumer failure to accomplish a task planned in the past (e.g. redeeming the rebate) is more likely when the deadline of completion is longer. This prediction is supported by experimental studies on various forms of procrastination and by field and experimental evidence on mail-in-rebates. We review a number of areas for which the theory may have important implications.
Keywords: mail-in rebate; naivete; regret; time inconsistency
JEL Codes: C70; D11; D91
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Present-biased preferences (D15) | Emotional disutility from failing to redeem rebates (D11) |
| Emotional disutility from failing to redeem rebates (D11) | Likelihood of redemption (D15) |
| Lengthening deadlines (C41) | Emotional disutility from failing to redeem rebates (D11) |
| Lengthening deadlines (C41) | Likelihood of redemption (D15) |
| Present-biased preferences (D15) | Underestimation of effort required to redeem rebates (H23) |
| Perceived deadline increases (G14) | Emotional disutility associated with not redeeming (D15) |