Buy Locally? Big-Box Stores and Time-Inconsistent Preferences

The widespread closure of Mom-and-Pop shops, or small, locally owned stores, in the United States and elsewhere is a well-recognized phenomenon. These closures are generally met with dissatisfaction from the local community. These stores, however, often close due to a lack of patronage on the part of the same consumers who are upset by their closure. This behavior and subsequent disappointment are puzzling. I show that this phenomenon can be explained using a hyperbolic discounting, or time-inconsistency, framework. I develop a theoretical model to show that time-inconsistent consumers are less likely to patronize local businesses than time-consistent consumers. The sophistication effect, however, makes consumers more likely to shop at the local store than if they were naive. Further, I show that local stores are more likely to close in a community with a larger proportion of naive time-inconsistent consumers and that these closures cause a loss in welfare.

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Conference Paper/ Presentation
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JEL Codes:
D03; D11; R22
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 Record created 2017-04-01, last modified 2018-01-23

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