A Model of Temptation-Induced Compromise

This paper models menu choice problems in which the decision maker (DM) faces temptation at the ex ante stage of choice and responds to this temptation by making a compromise. We introduce a new class of utilities, called the category model, which captures this phenomenon and provide axiomatic foundations for this model. Our theory provides an approach to modeling temptation that is distinct from the costly self-control approach, initiated by Gul-Pesendorfer (GP) (2001). Moreover, it provides a sharp representation of two behavioral phenomena of current interest in the decision theory literature the compromise effect and the attraction effect. The innovation of this paper is that we identify temptation as a common cause for both of these effects and nest both of these features within an axiomatic model of compromise.