Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/183492
Authors: 
Dertwinkel-Kalt, Markus
Köster, Mats
Peiseler, Florian
Year of Publication: 
2018
Series/Report no.: 
DICE Discussion Paper 304
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.
Subjects: 
Attention
Focusing
Bonus Contracts
JEL: 
D91
D18
D40
L10
ISBN: 
978-3-86304-303-2
Document Type: 
Working Paper
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