Publication Date: August 2017
We introduce and characterize a recursive model of dynamic choice that accommodates naiveté about present bias. The model incorporates costly self-control in the sense of Gul and Pesendorfer (2001) to overcome the technical hurdles of the Strotz representation. The important novel condition is an axiom for naiveté. We ﬁrst introduce appropriate deﬁnitions of absolute and comparative naiveté for a simple two-period model, and explore their implications for the costly self-control model. We then extend this deﬁnition for inﬁnite-horizon environments, and discuss some of the subtleties involved with the extension. Incorporating the deﬁnition of absolute naiveté as an axiom, we characterize a recursive representation of naive quasi-hyperbolic discounting with self-control for an individual who is jointly overoptimistic about her present-bias factor and her ability to resist instant gratiﬁcation. We study the implications of our proposed comparison of naiveté for the parameters of the recursive representation. Finally, we discuss the obstacles that preclude more general notions of naiveté, and illuminate the impossibility of a deﬁnition that simultaneously incorporates both random choice and costly self-control.
Naive, Sophisticated, Self-control, Quasi-hyperbolic discounting
JEL Classification Codes: D11, D15, D91CFDP 2099R
See CFP: CFP1695