Languages differ widely in the ways they encode time. I test the hypothesis that languages that grammatically associate the future and the present, foster future-oriented behavior. This prediction arises naturally when well-documented effects of language structure are merged with models of intertemporal choice. Empirically, I find that speakers of such languages: save more, retire with more wealth, smoke less, practice safer sex, and are less obese. This holds both across countries and within countries when comparing demographically similar native households. The evidence does not support the most obvious forms of common causation. I discuss implications for theories of intertemporal choice.
Cognitive dissonance is one of the most influential theories in psychology, and its oldest experiential realization is choice-induced dissonance. In contrast to the economic approach of assuming a person’s choices reveal their preferences, psychologists have claimed since 1956 that people alter their preferences to rationalize past choices by devaluing rejected alternatives and upgrading chosen ones. Here, I show that every study which has tested this preference-spreading effect has overlooked the potential that choices may reflect individual preferences. Specifically, these studies have implicitly assumed that subject’s preferences can be measured perfectly, i.e., with infinite precision. Absent this, their methods, even with control groups, will mistakenly identify cognitive dissonance when there is none. Correctly interpreted, several prominent studies actually reject the presence of choice-induced dissonance. This suggests that mere choice may not always induce rationalization, a reversal that may significantly change the way we think about cognitive dissonance as a whole.
While competition between firms producing substitutes is well understood, less is known about rivalry between complementors. We study the interaction between firms in markets with one-way essential complements. One good is essential to the use of the other but not vice versa, as arises with an operating system and applications. Our interest is in the division of surplus between the two goods and the related incentive for firms to create complements to an essential good.
Formally, we study a two-good model where consumers value A alone, but can only enjoy B if they also purchase A. When one firm sells A and another sells B, the firm that sells B earns a majority of the value it creates. However, if the A firm were to buy the B firm, it would optimally charge zero for B, provided marginal costs are zero and the average value of B is small relative to A. Hence, absent strong antitrust or intellectual property protections, the A firm can leverage its monopoly into B costlessly by producing a competing version of B and giving it away. For example, Microsoft provided Internet Explorer as a free substitute for Netscape; in our model, this maximizes Microsoft’s joint monopoly profits. Furthermore, Microsoft has no incentive to raise prices, even if all browser competition exits. This may seem surprising since it runs counter to the traditional gains from price discrimination and versioning. We also show that a essential monopolist has no incentive to degrade rival complementary products, which suggests that a monopoly internet service provider will offer net neutrality.
There are other means for the essential A monopolist to capture surplus from B. We consider the incentive to add a surcharge (or subsidy) to the price of B, or to act as a Stackelberg leader. We find a small gain from pricing first, but much greater profits from adding a surcharge to the price of B. The potential for A to capture B’s surplus highlights the challenges facing a firm whose product depends on an essential good.
Behavioral economics has demonstrated systematic decision-making biases in both lab and field data. But are these biases learned or innate? We investigate this question using experiments on a novel set of subjects — capuchin monkeys. By introducing a fiat currency and trade to a capuchin colony, we are able to recover their preferences over a wide range of goods and risky choices. We show that standard price theory does a remarkably good job of describing capuchin purchasing behavior; capuchin monkeys react rationally to both price and wealth shocks. However, when capuchins are faced with more complex choices including risky gambles, they display many of the hallmark biases of human behavior, including reference-dependent choices and loss-aversion. Given that capuchins demonstrate little to no social learning and lack experience with abstract gambles, these results suggest that certain biases such as loss-aversion are an innate function of how our brains code experiences, rather than learned behavior or the result of misapplied heuristics.
JEL Classification: C91, C99, D12, D46, D80, D81
Keywords: Prospect theory, Loss aversion, Reference dependence, Evolution, Neuroeconomics, Capuchin monkeys, Monkey business
Some two million Americans are currently incarcerated, with roughly six hundred thousand to be released this year. Despite this, little is known about the effects of confinement conditions on the post-release lives of inmates. Focusing on post-release criminal activity, we identify the causal effect of prison conditions on recidivism rates by exploiting a discontinuity in the assignment of federal prisoners to security levels. We find that harsher prison conditions are associated with significantly more post-release crime.
JEL Classification: K14, K42, J24, H4
Keywords: Crime, Prison, Recidivism, Social Capital, Peer Effects, Regression Discontinuity