Authors: Vigna, Stefano Della; Malmendier, Ulrike

Source: The American Economic Review, Volume 96, Number 3, June 2006 , pp. 694-719(26)

Publisher: American Economic Association

Abstract:

How do consumers choose from a menu of contracts? We analyze a novel dataset from three U.S. health clubs with information on both the contractual choice and the day-to-day attendance decisions of 7,752 members over three years. The observed consumer behavior is difficult to reconcile with standard preferences and beliefs. First, members who choose a contract with a flat monthly fee of over $70 attend on average 4.3 times per month. They pay a price per expected visit of more than $17, even though they could pay $10 per visit using a 10-visit pass. On average, these users forgo savings of $600 during their membership. Second, consumers who choose a monthly contract are 17 percent more likely to stay enrolled beyond one year than users committing for a year. This is surprising because monthly members pay higher fees for the option to cancel each month. We also document cancellation delays and attendance expectations, among other findings. Leading explanations for our findings are overconfidence about future self-control or about future efficiency. Overconfident agents overestimate attendance as well as the cancellation probability of automatically renewed contracts. Our results suggest that making inferences from observed contract choice under the rational expectation hypothesis can lead to biases in the estimation of consumer preferences.

Document Type: Research article

Publication date: 2006-06-01

More about this publication?

• The American Economic Review is a general-interest economics journal. The journal is published quarterly and contains articles on a broad range of topics. Established in 1911, the AER is among the nation's oldest and most respected scholarly journals in the economics profession.
• Editorial Board
• Information for Authors
• Subscribe to this Title
• Membership Information
• Terms & Conditions
• e-Publications for AEA Members
• AEAweb
• ingentaconnect is not responsible for the content or availability of external websites

Related content

• In this: publication
• By this: publisher
• In this Subject: Economics
• By this author: Vigna, Stefano Della ;  Malmendier, Ulrike

Website © Publishing Technology. Article copyright remains with the publisher, society or author(s) as specified within the article.

• Terms and conditions
• Privacy policy
• Information for advertisers