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ATTENTION VS. INATTENTION: EVIDENCE FROM THE KENTUCKY TARIFF EXPERIMENT
(Click above to download a pdf copy of the paper)
- Abstract: Theoretical and experimental studies have
shown that understanding when and why people are attentive and when and why
people reason accurately or make systematic mistakes are central questions
of the economics of human behavior. We study these questions empirically
using a micro-panel data set with repeated observations from more than 2,500
subjects when optional measured tariffs for local telephone calls were
introduced in Kentucky in an unanticipated manner. We find that consumers
are attentive, tend to underestimate their demand for telephone services and
initially make mistakes in their choice of tariffs. Yet, they actively
engage in tariff switching in order to reduce the monthly cost of local
telephone services despite savings of low magnitude. Households' reactions
are not symmetric: those who face a more complex and cognitively more
expensive tariff problem learn more slowly and are more likely to make
mistakes than households that face a simpler tariff choice problem.
Appropriately accounting for the effects of dynamic learning, state
dependence and unobserved heterogeneity is critical for determining the
underlying model of behavior supported by the data.
- Co-author: Ignacio Palacios-Huerta (London School of Economics).
- Publication: Previously circulated as CEPR DP No. 3604.
- JEL: C23, C25, D83, D90.
- First version: May 2002.
- Current version: September 2009.
- Funding: None.
- Seminars: University of California - Berkeley; CEMFI.
- Conferences: 4th CEPR conference on "Applied Industrial Organization," Leuven, 2003; Federal Trade Commission conference on "Behavioral Economics," Washington, 2007; Workshop on "Behavioral Economics and Market Competition," Frankfurt, 2009.
- Presentations: PDF.
- Data.
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