30/05/2012

Ulysses and the Knifemongers

If a sophisticated agent had access to an effective private self-control device, she would take advantage of it, reducing the value of a government intervention. However, we find it unlikely that fully effective self-control devices can be found in this context. Market-provided self-control mechanisms are probably undercut by the market mechanism itself: although firms have a financial incentive to provide self-control to agents, other firms have a financial incentive to break it down. For example, if a firm developed a self-control shot that causes pain when the consumer smokes, another firm has an incentive to develop a drug that relieves these effects for agents who temporarily want to get rid of their commitment. Other problems arise in contracting setups. If there are ex post gains to be made, the future self might want to renegotiate today's contract. But even if there are none,17 there is an ex post incentive to cheat on the contract: smoking is hard to verify in court. This leaves us with privately provided self-control mechanisms like betting with others or becoming involved in situations where it is very difficult to smoke, but these mechanisms are likely to run into enforcement problems similar to those discussed above.


Jonathan Gruber and Botond Köszegi, "Is Addiction 'Rational'? Theory and Evidence", Quarterly Journal of Economics 116,p. 1286

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