Attention-driven demand for bonus contracts

Abstract

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.

Automatic‐renewal contracts with heterogeneous consumer inertia

“…JOHNEN | 781 29 For an overview see Grubb (2015), or Eliaz and Spiegler (2015) 30 In my model exploitation leads to a more exploitative pricing structure, rather than the framing of prices. 31 Recently, Dertwinkel-Kalt, Köster, and Peiseler (2019) find that attentional focusing can explain contracts with large bonus payments to consumers. Bonuses attract attention, and can thereby increase the willingness to pay.…”

“…Recently, Dertwinkel‐Kalt, Köster, and Peiseler () find that attentional focusing can explain contracts with large bonus payments to consumers. Bonuses attract attention, and can thereby increase the willingness to pay.…”

Concentration Bias in Intertemporal Choice

“…Consequently, the decision maker is too prone to choose options with concentrated advantages: she exhibits "concentration bias". While direct empirical evidence on concentration bias is lacking, potentially important theoretical implications of concentration bias have been identified in, for instance, industrial organisation (Dertwinkel-Kalt et al, 2019;Apffelstaedt and Mechtenberg, 2020), political economy (Gallice and Grillo, 2020;Nunnari and Zápal, 2020), bargaining (Canidio and Karle, 2021), and intertemporal choice . In intertemporal choice, concentration bias implies systematic distortions between a decision maker's time preferences and her choices.…”

Attention-Driven Demand for Bonus Contracts

“…Dertwinkel-Kalt et al (2017a) demonstrate concentration bias in a laboratory experiment. 4 Attentional focusing provides a unified approach to explain puzzling behavior in a wide range of domains, such as consumer choice (e.g., the attraction effect and the efficacy of misleading sales, see Bordalo et al, 2013b), choice under risk (e.g., the fourfold pattern of risk attitudes, the Allais paradox, and preference reversals, see Bordalo et al, 2012), and financial decision making (e.g., the equity premium puzzle and skewness preferences, see Bordalo et al, 2013a;Dertwinkel-Kalt and Köster, 2018).…”