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An offer you can’t refuse? Incentives change how we inform ourselves and what we believe


Ambühl, Sandro (2017). An offer you can’t refuse? Incentives change how we inform ourselves and what we believe. CESifo Working Papers 6296, CESifo.

Abstract

Economists often espouse incentives, arguing that expanding choice sets cannot lower welfare. Yet, laws worldwide restrict incentives for many transactions, partly due to an untested concern that incentives cause poor decisions. I show experimentally that incentives skew information gathering and beliefs about what a transaction entails in a way that causally influences the participation decision, as policy makers suspected. A model of costly information acquisition shows this behavior is consistent with rationality, and thus unconcerning from an ex ante welfare economic perspective, but demands consideration under reasonable alternatives. The mechanisms apply in any situation where incentives interact with information acquisition.

Abstract

Economists often espouse incentives, arguing that expanding choice sets cannot lower welfare. Yet, laws worldwide restrict incentives for many transactions, partly due to an untested concern that incentives cause poor decisions. I show experimentally that incentives skew information gathering and beliefs about what a transaction entails in a way that causally influences the participation decision, as policy makers suspected. A model of costly information acquisition shows this behavior is consistent with rationality, and thus unconcerning from an ex ante welfare economic perspective, but demands consideration under reasonable alternatives. The mechanisms apply in any situation where incentives interact with information acquisition.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
Dewey Decimal Classification:330 Economics
JEL Classification:D030, D040, D840
Uncontrolled Keywords:Incentives, repugnant transactions, information acquisition, inattention, experiment
Language:English
Date:October 2017
Deposited On:07 Feb 2020 16:00
Last Modified:07 Feb 2020 16:16
Series Name:CESifo Working Papers
Number of Pages:98
ISSN:2364‐1428
Additional Information:Revised version
OA Status:Green
Official URL:https://www.cesifo.org/en/publikationen/2017/working-paper/offer-you-cant-refuse-incentives-change-how-we-inform-ourselves

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