Essays on consumers, risk and rationality

Abstract: One way economists overcome the difficulty in analyzing the behavior of economic agents is to assume they behave rationally, making the optimal choice in any situation. Despite being an arguably reasonable assumption, an agent may not always behave optimally, failing to pay proper attention to given information or lacking the knowledge to make complex assessments of future situations. Understanding in which situations consumers are rational, and in which they are not, is of importance to economists trying to understand the underlying mechanisms that drive behavior. If the rationality assumption doesn’t hold then behavioral predictions based on this assumption may prove to be incorrect, resulting in the loss of welfare or tax-payer money. This dissertation has centered on examining whether consumer purchasing behavior is consistent with economic rationality by studying purchases of cars on the Swedish new and used car markets. The chapters focus on the behavior of consumers in auctions, the extent to which consumers value product quality, whether consumers worry about firm bankruptcy and whether consumers correctly account for the variable costs associated with product usage.