IZA DP No. 4049: Commitment to Self-Rewards
published in European Economic Review, 2014, 68, 151-167.
Self-administered rewards are ubiquitous. They serve as incentives for personal accomplish¬ments and are widely recommended as tools for overcoming self-control problems. However, it seems puzzling why self-rewards can work: the prospect of a reward has a motivating force only if the threat of self-denial of the reward after low performance is credible. We explain how a rational forward-looking individual may achieve commitment to self-rewards, by applying Köszegi and Rabin's (2006) model of endogenous reference point formation to a self-regulation problem. Our results show why and when self-regulation built on self-rewards can be successful and thus illustrate the power, but also the limits, of self-rewards.