Rebate or Bait? A Model of Regret and Time Inconsistency in Consumer Behaviour

29 Pages Posted: 17 Aug 2006

See all articles by Francesco Drago

Francesco Drago

University of Messina, CSEF & CEPR

Dora Kadar

University of Siena - Department of Political Economy

Date Written: July 2006

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: Time inconsistency, regret, naivete, mail-in-rebate

JEL Classification: C70, D11, D91

Suggested Citation

Drago, Francesco and Kadar, Dora, Rebate or Bait? A Model of Regret and Time Inconsistency in Consumer Behaviour (July 2006). CEPR Discussion Paper No. 5757, Available at SSRN: https://ssrn.com/abstract=925009

Francesco Drago (Contact Author)

University of Messina, CSEF & CEPR ( email )

Piazza Pugliatti 1
Messina
Italy

Dora Kadar

University of Siena - Department of Political Economy ( email )

Siena 53100
Italy

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