Ulrike Malmendier

Contract Design and Self-Control: Theory and Evidence

How do rational firms respond to consumer biases? In this paper we analyze the profit-maximizing contract design of firms if consumers have time-inconsistent preferences and are partially naive about it. We consider markets for two types of goods: goods with immediate costs and delayed benefits (investment goods) such as health club attendance, and goods with immediate benefits and delayed costs (leisure goods) such as credit card-financed consumption. We establish three features of the profit-maximizing contract design with partially naive time-inconsistent consumers. First, firms price investment goods below marginal cost. Second, firms price leisure goods above marginal cost. Third, for all types of goods firms introduce switching costs and charge back-loaded fees. The contractual design targets consumer misperception of future consumption and underestimation of the renewal probability. The predictions of the theory match the empirical contract design in the credit card, gambling, health club, life insurance, mail order, mobile phone, and vacation time-sharing industries. We also show that time inconsistency has adverse effects on consumer welfare only if consumers are naive.

Contractibility and the Design of Research Agreements

We analyze how variations in contractibility affect the design of contracts in the context of biotechnology research agreements. A major concern of firms financing biotechnology research is that the R&D firms might use the funding to subsidize other projects or substitute one project for another. We develop a model based on the property-rights theory of the firm that allows for researchers in the R&D firms to pursue multiple projects. When research activities are non-verifiable, we show that it is optimal for the financing company to obtain the option right to terminate the research agreement while maintaining broad property rights to the terminated project. The option right induces the biotechnology firm researchers not to deviate from the proposed research activities. The contract prevents opportunistic exercise of the termination right by conditioning payments on the termination of the agreement. We test the model empirically using a new data set on 584 biotechnology research agreements. We find that the assignment of termination and broad intellectual property rights to the financing firm occurs in contractually difficult environments in which there is no specifiable lead product candidate. We also analyze how the contractual design varies with the R&D firms financial constraints and research capacities and with the type of financing firm. The additional empirical results allow us to distinguish the property-rights explanation from alternative stories, based on uncertainty and asymmetric information about the project quality or research abilities.

Overestimating Self-Control: Evidence from the Health Club Industry

Experimental evidence suggests that people make time-inconsistent choices and display overconfidence about positive personal attributes. Do these features affect consumer behavior in the market? To address this question we use a new panel data set from three US health clubs with information on the contract choices and the day-to-day attendance decisions of 7,978 health club members over three years. Members who choose a contract with a flat monthly fee of over

Target Revaluation after Failed Takeover Attempts - Cash versus Stock

70 attend on average 4.8 times per month. They pay a price per expected visit of more than

Who Makes Acquisitions? CEO Overconfidence and the Market's Reaction

17, even though a

Depression Babies: Do Macroeconomic Experiences Affect Risk Taking?*

10-per-visit fee is also available. On average, these users forgo savings of

Paying Not to Go to the Gym

700 during their membership. We review many aspects of the consumer behavior, including the interval between last attendance and contract termination, the survival probability, and the correlation between different consumption choices. The empirical results are diffcult to reconcile with the standard assumption of time-consistent preferences and rational expectations. A model of time-inconsistent agents with overconfidence about future time inconsistency explains the findings. The agents overestimate the future attendance and delay contract cancellation whenever renewal is automatic.

Overconfidence and Early-Life Experiences: The Effect of Managerial Traits on Corporate Financial Policies

We provide evidence that a significant fraction of the returns to merger announcements reflects target revaluation rather than the causal effect of the merger. In a sample of unsuccessful merger bids from 1980 to 2008, targets of cash offers are revalued by +15% after deal failure, whereas stock targets revert to their pre-announcement levels. Importantly, this result holds for the subsample where deal failure is exogenous to the target’s stand-alone value. Since cash targets are also not differentially related to future takeover offers, we conclude that cash deals signal positive information about the stand-alone value of the target. We also show that cash bidders revert to their pre-announcement levels, while stock bidders fall below. Our revaluation estimates imply economically large adjustments of naive stock-market-based synergy estimates.