1. 3. Self-Control in Peer Groups (Bénabou et al. [2002]) Set-Up of a general model for willpower and self-control: Imagine a situation, where an individual I lives in 2 periods and can decide at the beginning of each period whether he carries out (a)a no willpower activity (NW) or (b)a willpower dependent activity ( W). It is assumed that I opts for W. He has then the option to (a)Persevere (P) or (b)Give up (G). G gives an immediate payoff of A whereas G pays B in the future. Present Value of B > A. 20

2. But: Individual has a self-control problem. He does not only discount with a standard discount rate but with a hyperbolic discount rate (he uses a higher discount rate for earlier periods than for later periods) Not giving-in is costly. There exist two types of Individuals: c L = strong-willpower type (low cost) c H = low-willpower type (high cost) Individual does not know his c. He can only learn it from self- monitoring. 3. Self-Control in Peer Groups (Bénabou et al. [2002]) 21

3. Individual compares payoffs from P and G. To compare he needs to know about the probability of being a strong-willpower type. There exists some level of confidence p* where individual always opts for P. 3. Self-Control in Peer Groups (Bénabou et al. [2002]) X-Axis: p = level of confidence of being c L Y-Axis:x (p) = probability that I plays strategy P 22

4. Model which includes effects from peer groups: Two Individuals face the same self-control problem. Two agents have the same level of confidence in their willpower (p i =p j ) at beginning. Individual can observe actions of other agent and learn from it. By observing another agent, he can either (1)become more encouraged, if the other agent successfully resists temptation (-> plays P). (2)become less encouraged, if the other agent cannot resist temptation (-> plays G). 3. Self-Control in Peer Groups (Bénabou et al. [2002]) 23

5. Decision by one agent to persevere now leads to two possible different states of the world : –Agent 1 plays P ; Agent 2 plays P as well (PP). –Agent 1 plays P ; Agent 2 plays G (PG). New key element: expected return to resisting one‘s impulses now depends on what the other agent is likely to do. 3. Self-Control in Peer Groups (Bénabou et al. [2002]) 24

6. 3. Self-Control in Peer Groups (Bénabou et al. [2002]) 3 Situations possible: (1)Agent 1 plays P, Agent 2 plays P X PP (p) > X (p) (2)Agent 1 plays P, Agenst 2 plays G X PG (p) < X (p) (3)Agent 1 plays P, Agent 2 plays with some probability P and with some other probability G. 25

7. main results from paper: –With respect to self-control group membership is preferable, when : group members have at least a minimal level of confidence in their own and their peers‘ ability to resist temptation. partner is someone with a slightly worse self-control problem (a „too perfect“ partner“ is problematic because one does not learn anything from his actions). 3. Self-Control in Peer Groups (Bénabou et al. [2002]) 26

8. Bénabou, R. and Tirole J. (2000), „Willpower and Personal Rules“, Princeton University mimeo Bénabou, R., Battaglini, M. and Tirole, J. (2002), „Self-Control in Peer Groups“ Freud, S., „The Ego and the Id.“ (London: Hogarth) Stigler, George J., „The Theory of Price“, 3d ed. New York : Macmillan, 1966 Thaler, R.H. and H.M. Shefrin (1981), „An Economic Theory of Self-Control“, Journal of Political Economy, 89 (2), 392 – 406 Papers from Bénabou can be downloaded from http://www.princeton.edu/~rbenabou 4. Literature: 27