Reference no: EM133512474
Case Study: Boris is a motorcyclist who must cross the Bay Bridge from Oakland to San Francisco every day. Each day Boris decides whether to wear a helmet or not. If he wears a helmet he gets zero utility from crossing the bridge, but if he crashes the helmet will protect him perfectly. If he does not wear a helmet, he gets an immediate benefit, b, which is different each day. However, if he crashes without a helmet he will be disabled for the rest of his life. The expected cost of future disability each time he crosses the bridge is c. Boris has β, δ present-biased preferences with β < 1, and δ = 1. He discounts all costs and benefits more than one day in the future by β. Assume that c is high enough so that some days it is rational to wear a helmet, but low enough so that some days it is rational to not wear a helmet. Finally, as usual, assume that Boris has utility for money, y, represented by u(y) = y.
Question (a) Compute the marginal internality caused by Boris's present bias.
Question (b) What does the marginal internality represent?
Question (c) Why does the marginal internality not depend on whether or not Boris is a sophis ticate?
One day the government decides to paternalistically help Boris overcome the internality caused by his present-biased preferences. The fifirst policy they use is to offffer Boris an incentive payment, p, every time he wears a helmet. If he is wearing a helmet they send him the incentive payment electronically
Question (d) Suppose the payment is sent immediately, so that Boris receives it in the present time period. What is the optimal payment? Why does this payment overcome the internality?
Question (g)Suppose that the payment is sent one week in the future instead of immediately. What is the optimal payment now? Why is it difffferent from the immediate case above?
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