Essays on Behavioral Economic Theory

Abstract

This dissertation consists of three essays on behavioral economic theory with a focus on expectations-based reference dependence. In the first essay, I introduce a formal economic model of reference-dependent ego utility. The novel motivation captured by the model is that people experience disappointment and happiness when their self-image changes. I describe implications for behavior in static and dynamic settings, with focus on demand for ego-relevant information. Due to loss aversion, agents prefer to avoid small, unexpected pieces of information. On the other hand, agents who expect to learn a piece of information have a strictly higher demand for that information and may strictly prefer to follow through with learning. The second essay considers various extensions and applications of this basic model, including an application to a simple principal-agent setting. I show that altruistic agents may hide positive ego-relevant information from principals in order to avoid "getting their hopes up". In the third essay (co-authored with Matthew Rabin), we explore the consequences of expectations-based reference dependence over consumption in smooth, convex choice situations. In particular, we consider an agent who cares both about consumption levels and about good and (especially) bad news about each dimension of that consumption. We study her utility maximization when she makes plans before resolving uncertainty over which choices she will face. Among other results, we show that when classical utility theory predicts that two dimensions of consumption move comonotonically as uncertainty is resolved—such as residual spending and consumption of an inelastic good whose price varies—news utility has no effect on behavior.