An Offer You Can’t Refuse? Testing Undue Inducement

98 Pages Posted: 15 Feb 2017

See all articles by Sandro Ambuehl

Sandro Ambuehl

University of Toronto - Rotman School of Management

Date Written: October 1, 2017

Abstract

Around the world, laws limit incentives for transactions such as clinical trial participation, egg donation, or gestational surrogacy. A key reason is the notion of undue inducement−the conceptually vague and empirically largely untested idea that incentives cause harm by distorting individual decision making. Two experiments, including one based on a highly visceral transaction, show that incentives bias information search. Yet, such behavior is also consistent with Bayes-rational behavior. I develop a criterion that indicates whether choices admit welfare weights on benefit and harm that justify permitting the transaction but capping incentives. In my experimental data, no such weights exist.

Keywords: incentives, repugnant transactions, information acquisition, inattention, experiment

JEL Classification: D030, D040, D840

Suggested Citation

Ambuehl, Sandro, An Offer You Can’t Refuse? Testing Undue Inducement (October 1, 2017). CESifo Working Paper Series No. 6296, Available at SSRN: https://ssrn.com/abstract=2917195 or http://dx.doi.org/10.2139/ssrn.2917195

Sandro Ambuehl (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

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