Demand for Commitment Devices: Insights from a Reference Dependence Preferences Model
Posted: 14 Jul 2011
Date Written: July 12, 2011
This study addresses key behavioral factors affecting demand for commitment devices. We explicitly examine the effect of sophistication on demand for Roscas, one of the most well known informal commitment devices. We develop a model following a reference dependence preferences approach, and generalize existing formulations of partial naivete with respect to hyperbolic discounting by O’Donoghue and Rabin (2001). The model predicts that sophistication bias, specifically overestimation of time consistency, can actually increase the likelihood for the agents to take up commitment devices. We also find that the attachment effect, due to loss aversion as well as its interaction with hyperbolic discounting, increases the demand for commitment devices. Utilizing a unique combination of experiment and household data in Vietnam, we analyze the determinants of Rosca participation. The empirical exercise verifies our model’s predictions.
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