Return to the case of Jan,the hyperbolic discounter from the previous question. Suppose she can sign a contract that requires her to give up money equivalent to a loss of X utils if she does not undertake the action. Assume she does not behave consistent with her plans without this contract. How high would the contractual value of X have to be to prevent her inconsistency?

Question

Quizplus · Accepted Answer

The contractual value of X would have to be equal to C - B/2 to prevent her inconsistency. This is because the value of the contract to Jan is equal to the difference between the value of the action and the value of the loss, which is C - B. However, Jan is a hyperbolic discounter, so she values the loss more heavily than the action. Therefore, the contractual value of X must be greater than C - B in order to make the contract more valuable to Jan than the action. The correct answer is therefore A.

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