Under certain conditions, a rational doctor should adapt to non-adherence by choosing a treatment all patients complete (though less effective) when the probability of a patient being present-biased is sufficiently large. The aim of this paper is to model how doctors should adapt their medical treatment decisions if non-adherence is due to present-bias in the patient population, and to test the predictions of this model in a lab experiment. Non-adherence to treatments is prevalent. This paper was accepted by Matthew Shum, marketing. Nevertheless, when dominance must be obeyed, the seller may offer a menu of refund contracts with two-way distortions. Moreover, the buyer’s demand for screening can induce her to choose dominated refund contract. In addition, as memory can be perfectly recovered from the equilibrium contract choice, investing on any other memory-improving instrument is redundant. We also show that the buyer can exhibit the so-called flat-rate bias, even though her preference is time consistent and perfectly predicted. As a result, the equilibrium buyer surplus can be higher than that under perfect memory. In response, distortions in the optimal contract design can be either mitigated or intensified, leading to improved or undermined social welfare, respectively. This would yield an endogenous demand for separation in ex ante contract choice. As ex ante screening facilitates subsequent retrospection, the chosen contract can serve as a self-reminding instrument. Despite memory loss, the buyer can make ex post inference about her initially informed type from the chosen contract. In this paper, we investigate how limited memory may influence the optimal design of contracts for sequential screening. However, prior information can be losable, forgettable, or unattended. Therefore, a buyer may have private information on expected payoff at the contracting stage, and as time moves on, new information on other components of payoff may arrive. In many markets, buyers sign advance contracts before actual decisions on transactions or consumptions are made. We also show that time inconsistency has adverseĮffects on consumer welfare only if consumers are naive. Life insurance, mail order, mobile phone, and vacation time-sharing industries. The predictions of the theory match the empirical contract design in the credit card, gambling, health club, The contractual design targets consumer misperception of future consumption and underestimation of the renewal Third, for all types of goods firms introduce switching costs and chargeīack-loaded fees. Second, firms price leisure goods above marginal cost. First, firms price investment goods below marginal cost. We establish three features of the profit-maximizingĬontract design with partially naive time-inconsistent consumers. Goods with immediate costs and delayed benefits (investment goods) such as health club attendance, and goods with immediateīenefits and delayed costs (leisure goods) such as credit card-financed consumption. We consider markets for two types of goods: If consumers have time-inconsistent preferences and are partially naive about it. How do rational firms respond to consumer biases? In this paper we analyze the profit-maximizing contract design of firms
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