Risk, Delay, and Convex Self-Control Costs
51 Pages Posted: 7 Nov 2010
Date Written: November 5, 2010
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%, short-run relative risk aversion of about 2, and a time horizon of one day for the short-run self.
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