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Imperfect Memory and the Preference for Increasing Payments

Author

Listed:
  • John Smith

    (Rutgers University-Camden)

Abstract
In this paper we show how imperfect memory can imply a preference for increasing payments. We model an agent making a decision regarding effort in two periods where the cost of effort is imperfectly known. Before making the first decision, the agent receives a signal related to the cost of effort, which is subsequently forgotten. Before the second decision, the agent makes an inference regarding the content of this signal based on the publicly available information: the action taken and the wage paid. A preference for increasing payments naturally emerges from our model. With the auxiliary assumption that obtaining wage income requires an unknown cost of effort and obtaining rental income requires a known, zero cost of effort, our results provide an explanation for the experimental findings of Loewenstein and Sicherman (1991). These authors find evidence of a stronger preference for increasing "income from wages" rather than "income from rent." Additionally, our model makes the novel prediction that this preference for increasing payments will only occur when the contracts are neither very likely nor very unlikely to cover the cost of effort.

Suggested Citation

  • John Smith, 2008. "Imperfect Memory and the Preference for Increasing Payments," Departmental Working Papers 200805, Rutgers University, Department of Economics.
    • Handle: RePEc:rut:rutres:200805
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    References listed on IDEAS

    as
    1. Gary Gigliotti & Barry Sopher, 1998. "Analysis of Intertemporal Choice: A New Framework and Experimental Results," Departmental Working Papers 199804, Rutgers University, Department of Economics.
    2. Loewenstein, George F & Sicherman, Nachum, 1991. "Do Workers Prefer Increasing Wage Profiles?," Journal of Labor Economics, University of Chicago Press, vol. 9(1), pages 67-84, January.
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    18. Gottlieb, Daniel, 2014. "Imperfect memory and choice under risk," Games and Economic Behavior, Elsevier, vol. 85(C), pages 127-158.
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    Citations

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    as


    Cited by:

    1. Duffy, Sean & Smith, John & Woods, Kristin, 2015. "How does the preference for increasing payments depend on the size and source of the payments?," MPRA Paper 64212, University Library of Munich, Germany.
    2. Giovanni Immordino & Anna Maria C. Menichini & Maria Grazia Romano, 2015. "Contracts with Wishful Thinkers," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 24(4), pages 863-886, October.
    3. repec:cup:judgdm:v:8:y:2013:i:1:p:74-90 is not listed on IDEAS
    4. Duffy, Sean & Smith, John, 2013. "Preference for increasing wages: How do people value various streams of income?," Judgment and Decision Making, Cambridge University Press, vol. 8(1), pages 74-90, January.

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    More about this item

    Keywords

    imperfect recall; Self-Perception Theory; sequences of payments;
    All these keywords.

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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