Endogenous Attention to Costs
Thunström, L., Jones-Ritten, C., (2018) Endogenous attention to costs, Journal or Risk and Uncertainty, Forthcoming.
35 Pages Posted: 15 Nov 2018 Last revised: 16 Jan 2019
Date Written: October 14, 2018
Studies show that consumers are often unaware of the price of their purchases. We examine if such ignorance may be willful. We develop a model entailing consumers who may feel conflicted about spending – some people have an inherent preference for overspending (“spendthrifts”). We show that if overspending causes regret, spendthrifts are better off in the short-term from ignoring costs to their consumption (i.e., prices), when ignorance reduces anticipated regret. In the long-term, ignorance of costs may, however, be harmful, since it acts to exacerbate spendthrifts’ overconsumption. Further, our model shows consumers who are unconflicted about their spending, or have an inherent preference to underspend (“tightwads”), do not benefit from ignoring costs to their consumption in the short-term. We test the implications of our model against two datasets – a field dataset from a supermarket and data from a websurvey entailing a hypothetical experiment. We find support for our model implications that spendthrifts pay less attention to prices, and that their inattention may be endogenous (i.e., willful or strategic). Our results may help explain previous puzzling findings of low consumer price knowledge. Further, our finding that all consumer groups addressed herein long-term benefit from price saliency provides support for policies that ensure prices are transparent and salient to consumers.
Keywords: strategic ignorance; willful ignorance; price inattention; pain of paying; price transparency; price saliency
JEL Classification: D11; D12; D81; D83; D91
Suggested Citation: Suggested Citation