How do rational firms respond to consumer biases? In this paper, we analyze the profit-maximizing contract design of firms if consumers have time-inconsistent preferences and are partially naive about it. We consider markets for two types of goods: goods with immediate costs and delayed benefits (investment goods) such as health club attendance, and goods with immediate benefits and delayed costs (leisure goods) such as credit card-financed consumption. We establish three features of the profit-maximizing contract design with partially naive time-inconsistent consumers. First, firms price investment goods below marginal cost. Second, firms price leisure goods above marginal cost. Third, for all types of goods firms introduce switching costs and charge back-loaded fees. The contractual design targets consumer misperception of future consumption and underestimation of the renewal probability. The predictions of the theory match the empirical contract design in the credit card, gambling, health club, life insurance, mail order, mobile phone, and vacation time-sharing industries. We also show that time inconsistency has adverse effects on consumer welfare only if consumers are naive.

Intertemporal preferences are di ¢ cult to measure. We estimate time preferences using a structural bu¤er stock consumption model and the Method of Simulated Moments. The model includes stochastic labor income, liquidity constraints, child and adult dependents, liquid and illiquid assets, revolving credit, retirement, and discount functions that allow short-run and long-run discount rates to di¤er. Data on retirement wealth accumulation, credit card borrowing, and consumption-income comovement identify the model. Our benchmark estimates imply a 40% short-term annualized discount rate and a 4.3 % long-term annualized discount rate. Almost all speci…cations reject the restriction to a constant discount rate. Our quantitative results are sensitive to assumptions about the return on illiquid assets and the coe ¢ cient of relative risk aversion. When we jointly estimate the coe ¢ cient of relative risk aversion and the discount function, the short-term discount rate is 15 % and the long-term discount rate is 3.8%.

This paper estimates the structural parameters of a job search model with hyperbolic discounting and endogenous search effort. It estimates quantitatively the degree of hyperbolic discounting, and assesses its implications for the impact of various policy interventions aimed at reducing unemployment. The model is estimated using data on unemployment spells and accepted wages from the National Longitudinal Survey of Youth (NLSY). The likelihood function explicitly incorporates all the restrictions implied by the optimal dynamic programming solution to the model. Both observed and unobserved heterogeneity are accounted for. A model with hyperbolic preferences substantially improves the fit of the data. The structural estimates are also used to evaluate alternative policy interventions for the unemployed. Estimates based on a model with exponential discounting may lead to biased inference on the economic impact of policies. (JEL: C6, C73, D90, J64 J68).

Popular wisdom holds that publishers revise college textbooks mainly to kill off the secondary market for used books. While this behavior might be profitable if consumers are myopic, uninformed or have high short-run discount rates (that exceed the publishers'), neoclassical authors have noted that it will typically not be profitable if publishers can precommit not to cut prices and if consumers are forward-looking and have similar discount rates as the publishers; the consumer's willingness to pay for new books falls if they know that they cannot resell their used books. Using a large new dataset on all textbooks sold in psychology, biology and economics in the 10 semesters from 1997 to 2001, we estimate a demand system for books to test whether textbook consumers are forward-looking. The data strongly support the view that students are forward-looking with low short-run discount rates and that they have rational expectations of publishers ' revision behavior. When the students buy their textbooks, they correctly take into account the probability that they will not be able to resell their books at the end of the semester due to a new edition release. Conditional on faculty assignment behavior, simulation results suggest that students are sufficiently forwardlooking that publishers could not raise revenues by accelerating current revision cycles.

This study investigates whether models of forward looking behavior explain the observed patterns of heavy drinking and smoking of men in late middle age in the Health and Retirement Study better than myopic models. We develop and estimate a sequence of nested models which differ by their degree of forward looking behavior. Our empirical findings suggest that forward looking models fit the data better than myopic models. These models also dominate other behavioral models based on out-of-sample predictions using data of men aged 70 and over. Myopic models predict rates of smoking for old individuals which are significantly larger than those found in the data on elderly men.

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This paper uses Þeld evidence and a structural consumption-savings model to estimate discount functions. Evidence on wealth accumulation implies that people act patiently when considering long-term decisions, while data on credit card borrowing and consumption-income comovement suggests impatient behavior in the short term. Using the Method of Simulated Moments we estimate an institutionally rich model that features stochastic labor income, liquidity constraints, child and adult dependents, liquid and illiquid assets, revolving credit, retirement, and quasi-hyperbolic discount functions. We Þnd benchmark estimates of 40 % for the shortterm discount rate and 4.3 % for the long-term discount rate. Most speciÞcations reject the null hypothesis of time-consistent exponential discounting. Exact quantitative results depend on assumptions about the return on illiquid assets and the coefficient of relative risk aversion.

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Using data from the NLSY79, we structurally estimate a dynamic model of the life cycle decisions of young women. The women make sequential joint decisions about school attendance, work, marriage, fertility and welfare participation. We use the model to perform counterfactual simulations designed to shed light on three questions: (1) How much of observed minoritymajority differences in behavior can be attributed to differences in labor market opportunities, marriage market opportunities, and preference heterogeneity? (2) How does the welfare system interact with these factors to augment those differences? (3) How can new cohorts that grow up under the new welfare system (TANF) be expected to behave compared to older cohorts?

Economists have recently argued that time inconsistency may play a central role in explaining intertemporal behavior, particularly among poor households. However, time-preference parameters are typically not identified in standard dynamic choice models and little is known about the fraction of inconsistent agents in the population. We formulate a dynamic discrete choice model in an unobservedly heterogeneous population of possibly time-inconsistent agents motivated by specifically collected information combined with a field intervention in rural India. We identify and estimate all time-preference parameters as well as the population fractions of time-consistent and “naïve ” and “sophisticated ” timeinconsistent agents. We estimate that time-inconsistent agents account for more than half of the population and that “sophisticated ” inconsistent agents are considerably more present-biased than their “naïve ” counterparts. We also examine whether there are other differences across types (e.g. in risk and cost preferences) and find that these differences are small relative to the differences in time preferences. JEL: I1,I3