| This dissertation consists of two essays on behavioral economics. The first essay studies the effect of time-inconsistent preference on the insurance market, while the second presents a bargaining model that incorporates relative concern and player's intention. In the moral hazard insurance model, consumers are ex-ante homogeneous except on the dimension of their quasi-hyperbolic discounting factors. Market equilibria with such present-biased consumers are examined. Between the stage of insurance purchase and the stage of uncertainty realization, there exists an effort stage, in which consumers choose effort levels according to their discounting types. Ex-post risks are solely determined by their precautionary effort choices. This essay shows that consumer-bias might serve as a possible explanation to the negative association between ex-post risk and insurance purchase, or advantageous selection, identified in some insurance markets by many empirical studies. Furthermore, the multi-period model presented in this essay shows that consumer present-bias might also be the reason why insurance contracts tend to be short-term. The second essay in this dissertation attempts to model escalation behavior using an extensive form psychological game. Relative concern and player intention are introduced into a Rubinstein bargaining model. Using a (modified) Centipede Game, I have shown that escalation could be supported as equilibrium if players not only care about their material payoffs but also how they are doing relative to their opponents. Intention of opponents is also an important determinant of whether a player would escalate or not, and is modeled using two layers of beliefs. |
