Essays in Behavioral Economics

Abstract

This thesis uses economic theory to investigate two important behavioral phenomena: the fact that the beliefs of individuals can be distorted from the truth, and that individuals can endogenously transition between different modes of cognition which affect the rationality of their decision-making. These ideas are looked at in three distinct applications. Chapter 2 looks at a setting in which a contract designer can distort the beliefs of an individual away from the truth through how he presents or frames a contract he is providing. The susceptibility of the agent to these belief distortions is a function of her mode of cognition, which is endogenously determined as a function of the frame. The model generates novel predictions due to the equilibrium effects resulting from the joint determination of framing and cognition. In particular, it is shown that cognitive investment may actually be increasing in its own cost. Chapter 3 investigates an intra-personal setting in which an agent can distort her own beliefs through the use of different types of self-set goals, and may or may not find it advantageous to do so. This is used to provide a foundation for why individuals repeatedly set goals for themselves that they deviate from. It is shown that individuals with large self-control problems will utilize goals that distort beliefs and, thus, will end up deviating from their self-set goals. Finally, in Chapter 4, the theory of endogenous modes of cognition is employed in a communication setting. It is shown that bounded cognition can actually increase the propensity for information to be transmitted in equilibrium. A paradox of cognition is established: the greater the cognitive ability of the agent, the less information is revealed to her in equilibrium.