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Self-rationing: self-control in consumer choice

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Many consumer decisions are repeated purchase and consumption choices that are all subject to the same global normative constraint, for instance, the consumer’s lifetime budget constraint in a purchase decision, her expected life expectancy in a time allocation decision, or her weekly grocery inventory in deciding what to cook for dinner. To illustrate, Ando and Modigliani’s (1963) life-cycle hypothesis of saving assumes that consumers maximize utility subject to their available resources, which are expressed as the sum of their current and discounted future earnings plus their current wealth. At any given time, consumers plan to spread consumption of their total resources evenly over the remainder of their life span. Such consumption smoothing occurs even though current assets and income may fluctuate over time. Thus, borrowing allows consumers with lower initial assets but higher expected future income to make utility-maximizing consumption choices within the overall, lifetime budget constraint. For example, expecting to pay off a home mortgage from future income, young families often finance purchases of homes they cannot afford to pay for out of their current assets or income. In contrast to this normative analysis, however, intuition as well as empirical observation suggest that consumers are not very capable of taking lifetime budget constraints into account when making repeated consumption choices that are distributed over time (see Herrnstein and Prelec 1992). The sheer computational complexity and uncertainty involved in the required present-value calculations suggest that the life-cycle hypothesis does not provide a realistic description of intertemporal consumer choice (Shefrin and Thaler 1988). For example, the surge in personal bankruptcies in the 1990s hints that many consumers take on more debt than they can afford. Experimental data show that consumers often undervalue future relative to current resources, resulting in excessive current consumption (Kotlikoff, Samuelson, and Johnson 1988). In particular, recent experimental results by Soman and Cheema (2001) suggest that consumers overspend when their lifetime budget constraint is not salient to them. Thus, global resource constraints (e.g., a lifetime budget constraint) may not be tenable as a guide for consumers’ spending and consumption decisions because they are often too abstract and difficult to compute or gauge. In this paper, I suggest that consumers whose preferences are dynamically inconsistent, as much of the work in this volume suggests, will consume excessively when they are faced with such intangible global constraints because nothing limits their consumption at the “local” level. These consumers don’t know when to “say when.” Instead, they seem to consume at a rate that is a monotonic function of their immediately available (local) resources. This paper explores how consumers with self-control problems (i.e., with dynamically inconsistent preferences) cope with choice situations in which the relevant resource constraints are global and intangible. I will argue that consumers often have enough insight into these problems to employ self-rationing strategies that induce more tangible, localized constraints to control their choices. While framing choices in narrow, local terms may often induce suboptimal behavior (Read, Loewenstein, and Rabin 1999), the local constraints employed by self-rationing help consumers partially compensate for their inability to stick to imperceptible global constraints. In addition to (monetary) budget constraints, the next section will examine the effect on consumption of relaxing two other forms of resource constraints, on goods in inventory and on time. In particular, I will rely on evidence from the marketing literature on marketing tactics that enhance these effects. Section III will discuss empirical evidence of self-control by self-rationing, of consumers actively and strategically trying to keep themselves from consuming resources excessively by self-imposing limits where marketers or policy makers do not provide any. Section IV will conclude by showing why evidence of self-rationing is important for research on intertemporal choice and self-control and what constitutes such evidence.

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en

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application/pdf

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http://flora.insead.edu/fichiersti_wp/inseadwp2001/2001-63.pdf

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