The Brain as a Hierarchical The Brain as a Hierarchical Organization Organization I sabelle Brocas Juan D. Carrillo I sabelle Brocas Juan D. Carrillo USC and CEPR USC and CEPR USC and CEPR USC and CEPR Preliminary: May 2005 Preliminary: May 2005
What is “ “Neuroeconomic Theory Neuroeconomic Theory” ”? ? What is Stylized evidence of Neuroscience: Stylized evidence of Neuroscience: which brain system is activated when which brain system is activated when Modeling techniques of Micro theory: Modeling techniques of Micro theory: agency & incentive theory, agency & incentive theory, organizational design, etc. organizational design, etc. The brain is and should be modeled as is and should be modeled as The brain a multi- -agent organization agent organization a multi
Objective of this research Objective of this research Understand behaviors difficult to reconcile with traditional Understand behaviors difficult to reconcile with traditional theories (just as recent behavioral economics literature): theories (just as recent behavioral economics literature): • Guilt Guilt • • Mistaken consumption of habit Mistaken consumption of habit- -forming goods, etc. forming goods, etc. • Provide “ “micro micro- -microfoundations microfoundations” ” for characteristics for characteristics Provide traditionally considered exogenous: traditionally considered exogenous: • Discounting Discounting • • Risk Risk- -aversion, etc. aversion, etc. • Revisit the individual decision- -making paradigm making paradigm Revisit the individual decision (not decision- -theory but game theory but game- -theory approach) theory approach) (not decision
This paper This paper Incorporate in a model of the brain two findings that have Incorporate in a model of the brain two findings that have received support in neuro- -experiments : experiments : received support in neuro 1. Conflict in the brain between [McClure et al. (2004)] Conflict in the brain between [McClure et al. (2004)] 1. • Forward- -looking system (pre looking system (pre- -frontal cortex) frontal cortex) • Forward capable of intertemporal intertemporal tradeoffs tradeoffs capable of • Myopic system (paralimbic paralimbic cortex) cortex) • Myopic system ( interested only in immediate gratification interested only in immediate gratification 2. Restricted cognitive access within brain to: Restricted cognitive access within brain to: 2. • Motivations • Motivations • Beliefs • Beliefs “The heart has its reasons which reason knows nothing of The heart has its reasons which reason knows nothing of” ” “ (Blaise Blaise Pascal) Pascal) (
A caveat A caveat 1. Assumptions based on neuroscience evidence: Assumptions based on neuroscience evidence: 1. • Conflict between myopic and forward- -looking looking • Conflict between myopic and forward • Asymmetric information • Asymmetric information 2. Modeling choices (no evidence yet) Modeling choices (no evidence yet) 2. • Vertical hierarchy: • Vertical hierarchy: - Forward- -looking = planner looking = planner - Forward - Myopic = doer - Myopic = doer • Private information possessed by myopic • Private information possessed by myopic
Related literature Related literature 1. Hyperbolic discounting with incomplete information Hyperbolic discounting with incomplete information 1. (Carrillo- -Mariotti Mariotti, Brocas , Brocas- -Carrillo, Carrillo, Benabou Benabou- -Tirole Tirole, Amador , Amador- -Werning Werning- -Angeletos Angeletos) ) (Carrillo Main Differences: Main Differences: • Conflict within within (rather than between) periods (rather than between) periods • Conflict • Asym. info . info within within (rather than between) periods (rather than between) periods • Asym 2. Other dual Other dual- -self theories self theories 2. (Thaler Thaler- -Shefrin Shefrin, , Fudenberg Fudenberg- -Levine Levine, , Loewenstein Loewenstein- -O O’ ’Donoghue Donoghue, , Benhabib Benhabib- -Bisin Bisin, , ( Bernheim- -Rangel) Rangel) Bernheim Main Differences: Main Differences: • Asym. Info . Info (rather than full info.) within periods (rather than full info.) within periods • Asym • Constraints (rather than costs) in decision (rather than costs) in decision- -making making • Constraints
The model The model • 2 periods of consumption and labor and 2 periods of consumption and labor and • ( , ) ( , ) c 2 n c 1 n 2 1 • Utility Utility • “Principal” P prefrontal cortex θ − + θ − [ ( ) ] [ ( ) ] u c n u c n 1 1 1 2 2 2 “Agent 1” A 1 “Agent 2” A 2 paralimbic cortex at date 1 paralimbic cortex at date 2 θ − θ − ( ) ( ) u c n u c n 2 2 2 1 1 1 where u u’ ’ > 0, > 0, u u” ” < 0 and < 0 and θ θ t is valuation at date t t where t is valuation at date
≥ • Consumption is non Consumption is non- -negative: negative: 0 • c t n t ∈ • Labor is non Labor is non- -negative and bounded: negative and bounded: • [ 0 , ] n • 1 unit of labor 1 unit of labor � � 1 unit of income 1 unit of income � � 1 unit of consumption 1 unit of consumption • • Perfect capital markets with interest rate Perfect capital markets with interest rate r r > 0 > 0 • � Intertemporal Intertemporal budget constraint: budget constraint: � + + ≤ + + ( 1 ) ( 1 ) c r c n r n 1 2 1 2 [Note: no individual rationality constraint] [Note: no individual rationality constraint]
• A chooses his preferred pair • t chooses his preferred pair A t ( , ) c t n t … but but P P can restrain can restrain A ’s choices s choices … t ’ A t and we allow any any conceivable rule / restriction conceivable rule / restriction and we allow • P deals with A and A sequentially • P deals with 1 and 2 sequentially A 1 A 2 θ − + θ − [ ( ) ] [ ( ) ] u c n u c n 1 1 1 2 2 2 Principal P date 1 date 2 t Agent 1 A 1 Agent 2 A 2 θ − θ − ( ) ( ) u c n u c n 1 1 1 2 2 2
Benchmark: Benchmark: conflict under full information conflict under full information P knows the valuation knows the valuation θ θ t of A t of A t P t For each θ θ t , P imposes on A a specific pair θ θ For each t , P imposes on t a specific pair o o A t ( ( ), ( )) c n t t t t Main characteristics of : Main characteristics of : θ θ o o ( ( ), ( )) c n t t t t - Consumption at t t increases with increases with θ θ t (valuation at t t ) ) - Consumption at t (valuation at - Labor at 1 is maximum (positive interest rate on savings) - Labor at 1 is maximum (positive interest rate on savings) - Labor at 2 is adjusted to meet budget constraint - Labor at 2 is adjusted to meet budget constraint � Positive relation consumption at 1+2 and labor at 1+2 Positive relation consumption at 1+2 and labor at 1+2 � “work more in your lifetime to consume more in your lifetime work more in your lifetime to consume more in your lifetime” ” “ � No relation consumption at 1 and labor at 1 No relation consumption at 1 and labor at 1 �
Conflict under asymmetric information Conflict under asymmetric information knows his valuation θ θ t t knows his valuation A t A t only knows that θ θ t i.i.d. F( F( θ θ t ) P only knows that t i.i.d. t ) P cannot impose restrictions that depend on valuation θ θ t P cannot impose restrictions that depend on valuation � P � t Note: : Note Because constraint constraint (no access to (no access to θ θ t ) instead of cost cost of of Because t ) instead of imposing choices: imposing choices: - No presupposed tradeoff - No presupposed tradeoff - No preconceived idea of which restriction P P will will impose impose - No preconceived idea of which restriction
: P vs. A Optimal rule at date 2 : P vs. A 2 Optimal rule at date 2 2 Trivial. No restrictions (except budget balance) because at . No restrictions (except budget balance) because at Trivial date 2 no conflict between P and A date 2 no conflict between P and A 2 2 sunk θ − + θ − [ ( ) ] [ ( ) ] u c n u c n 1 1 1 2 2 2 Principal P date 2 t Agent 2 A 2 θ − ( ) u c n 2 2 2
: P vs. A Optimal rule at date 1 : P vs. A 1 Optimal rule at date 1 1 θ − + θ θ − θ * * * [ ( ) ] [ ( ( )) ( , , ( ))] u c n u c n c n c 1 1 1 2 2 2 2 1 1 2 2 Principal P date 1 t Agent 1 A 1 θ − ( ) u c n 1 1 1
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