We argue that poverty can perpetuate itself by undermining the capacity for self-control. In line with a distinguished psychological literature, we consider modes of self-control that involve the self-imposed use of contingent punishments and rewards. We study settings in which consumers with quasi-hyperbolic preferences confront an otherwise standard intertemporal allocation problem with credit constraints. Our main result demonstrates that low initial assets can limit self-control, trapping people in poverty, while individuals with high initial assets can accumulate indefinitely. Thus, even temporary policies that initiate accumulation among the poor may be effective. We examine implications concerning the effect of access to credit on saving, the demand for commitment devices, the design of financial accounts to promote accumulation, and the variation of the marginal propensity to consume across income from different sources. We also explore the nature of optimal self-control, demonstrating that it has a simple and behaviorally plausible structure that is immune to self-renegotiation.

This paper examines the nature of rational choice in strategic games.Although there are many reasons why an agent might select a Nash equilibrium strategy in a particular game, rationality alone does not require him to do so.A natural extension of widely accepted axioms for rational choice under uncertainty to strategic environments generates an alternative class of strategies, labelled "rationalizable."It is argued that no rationalizable strategy can be discarded on the basis of rationality alone, and that all rationally justifiable strategies are members of the rationalizable set.The properties of rationalizable strategies are studied, and refinements are considered.PROOF OF PROPOSITION 5.5: Since under the specified conditionsf(-) is a contraction mapping, Nash equilibrium is unique.We need only show P(G) = N*(G).Since P(G) is the intersection of an infinite sequence of compact, nested sets, it is compact.Consequently, we can define di = max d(s,, s,).s,,s, E-P,(G) Assume without loss of generality that d, > di Vi > 1.If point rationalizable strategies are not unique, then di > 0. Let s' and sj' be the strategies for which d(s'1, sj') = dl.There must exist t', t' e P(G)such that fl(t') = sj, and fl(t") = sj', with g,(t') = v1(t") (the first component doesn't effect fl( )).Now d(t', t") < ( d2 ) < d1(I-1)1/2. (i=2 J Further, d(f(t'), f(t")) > d(s', sj') = dl.So d(f(t), ft"))> d(t, t"I(I 1 ,/2

Cumulative Prospect Theory (CPT), the leading behavioral account of decisionmaking under uncertainty, avoids the dominance violations implicit in Prospect Theory (PT) by assuming that the probability weight applied to a given outcome depends on its ranking. We devise a simple and direct nonparametric method for measuring the change in relative probability weights resulting from a change in payoff ranks. We find no evidence that these weights are even modestly sensitive to ranks. Conventional calibrations of CPT preferences imply that the percentage change in probability weights should be an order of magnitude larger than we observe. It follows either that probability weighting is not rank‐dependent, or that the weighting function is nearly linear. Nonparametric measurement of the change in relative probability weights resulting from changes in probabilities rules out the second possibility. Additional tests nevertheless indicate that the dominance patterns predicted by PT do not arise. We reconcile these findings by positing a form of complexity aversion that generalizes the well‐known certainty effect.

Recent work demonstrates that dynastic assumptions guarantee the irrelevance of all redistributional policies, distortionary taxes, and prices-the neutrality of fiscal policy (Ricardian equivalence) is only the "tip of the iceberg." In this paper, we investigate the possibility of reinstating approximate Ricardian equivalence by introducing a small amount of friction in intergenerational links. If Ricardian equivalence depends upon significantly shorter chains of links than do these stronger neutrality results, then friction may dissipate the effects that generate strong neutrality, without significantly affecting the Ricardian result. Although this intuition turns out to be essentially correct, we show that models with small amounts of friction have other untenable implications. We conclude that the theoretical case for Ricardian equivalence remains tenuous.

[We extend the principal-agent framework with risk-neutral principals to situations in which several principals simultaneously and independently attempt to influence a common agent. We show that implementation is, in the aggregate, always efficient (cost-minimizing), and that noncooperative behavior induces an efficient (potentially second-best) action choice if and only if collusion among the principals would implement the first-best action at the first-best level of cost. We also investigate the existence of equilibria, the distribution of net rewards among principals, the characteristics of actions chosen in inefficient equilibria, and potential institutional remedies for welfare losses induced by noncooperative behavior.]

A norm of 50–50 division appears to have considerable force in a wide range of economic environments, both in the real world and in the laboratory. Even in settings where one party unilaterally determines the allocation of a prize (the dictator game), many subjects voluntarily cede exactly half to another individual. The hypothesis that people care about fairness does not by itself account for key experimental patterns. We consider an alternative explanation, which adds the hypothesis that people like to be perceived as fair. The properties of equilibria for the resulting signaling game correspond closely to laboratory observations. The theory has additional testable implications, the validity of which we confirm through new experiments.

We examine legislative policy making in institutions with two empirically relevant features: agenda setting occurs in real time and the default policy evolves. We demonstrate that these institutions select Condorcet winners when they exist, provided a sufficient number of individuals have opportunities to make proposals. In policy spaces with either pork barrel or pure redistributional politics (where a Condorcet winner does not exist), the last proposer is effectively a dictator or near-dictator under relatively weak conditions. Copyright The Econometric Society 2006.