Leontiou, A., "Dynamic Contracts with Loss-Averse Consumers"

Title: "Dynamic Contracts with Loss-Averse Consumers"
Co-authored with Konstantinos Protopapas

Speaker: Postdoctoral Researcher Anastasia Leontiou, University of Vienna

Host:  Assistant Professor Efthymios Athanasiou, Department of Economics, Athens University of Economics and Business

Room:  76, Patission Str., Antoniadou Wing, 4th floor, Room A41

Abstract: Many contracts feature introductory discounts followed by steep price increases. In this paper, we develop a dynamic model with uncertain consumption and reference-dependent consumer preferences à la Kőszegi and Rabin (2006). We show that, unlike contracts for rational consumers, contracts tailored to loss-averse consumers feature margins that increase over time,  shifting from a bargain to a rip-off and thereby locking consumers in. Furthermore, the seller prefers contracts that require no consumer commitment, as this allows it to leverage consumers’ dislike of uncertainty. When rational and loss-averse consumers coexist, this design variation facilitates screening, with the seller offering a menu of contracts under which each type self-selects into its own contract.