Attention-driven demand for bonus contracts

Arbeitspapier

In many markets supply contracts include a series of small, regular payments made by consumers and a single, large bonus that consumers receive at some point during the contractual period. But, if for instance its production costs exceed its value to consumers, such a bonus creates inefficiencies. We offer a novel explanation for the frequent occurrence of bonus contracts, which builds on a model of attentional focusing. Our main result identifies market conditions under which bonus contracts should be observed: while a monopolist pays a bonus to consumers - if at all - only for low-value goods, firms standing in competition always - i.e., independent of the consumers’ valuation - offer bonus contracts. Thus, competition does not eliminate but rather exacerbates inefficiencies arising from contracting with focused agents. Common contract schemes in markets for electricity, telephony, and bank accounts are consistent with our model, but cannot be reconciled with alternative approaches such as models on consumption smoothing, (quasi-)hyperbolic discounting, or switching costs.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CESifo Working Paper ; No. 7539

Classification and Topics

• Classification: Wirtschaft ; Micro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making‡ ; Consumer Protection ; Market Structure, Pricing, and Design: General ; Market Structure, Firm Strategy, and Market Performance: General
• Subject: attention ; focusing ; bonus contracts

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Dertwinkel-Kalt, Markus ; Köster, Mats ; Peiseler, Florian
• Event: Veröffentlichung
• (who): Center for Economic Studies and ifo Institute (CESifo)
• (where): Munich
• (when): 2019

Further information

• Handle: http://hdl.handle.net/10419/198899
• Last update: 10.03.2025, 11:45 AM CET