Contracts with Framing∗

We study a model of contracts in which a profit-maximizing seller uses framing to influence buyers’ purchase behavior. Framing temporarily affects how buyers evaluate different products, and buyers can renege on their purchases after the framing effect wears off. We characterize the optimal contracts with framing and their welfare properties in several settings. Framing that is not too strong reduces total welfare in regulated markets with homogenous buyers, but increases total welfare in markets with heterogenous buyers when the proportion of buyers with low willingness to pay is small. ∗We thank Daron Acemoglu, V. Bhaskar, Miguel Brendl, Jacques Crémer, Daniel Diermeier, Simone Galperti, Botond Koszegi, Margaret Meyer, Alessandro Pavan, Andrew Rhodes, Andy Skrzypacz, Ran Spiegler, and seminar participants at University of Montreal, Northwestern, Penn State, Stanford, the European Summer Symposium in Economic Theory on Behavioral Mechanism Design, the Bounded Rationality in Choice conference at St. Andrews, and the Northwestern-Toulouse workshop on Industrial Organization for helpful comments. †Salant: Northwestern University; [email protected]. Siegel: The Pennsylvania State University;