Essays on the context effects bias and on the relationship between competition and innovation

Chapter one studies a model of reference-dependent choice from sets of options grouped into categories. The proposed model is consistent with experimental evidence documenting context effects in a variety of choice situations. In my model, the reference point for any given category is subjective, and corresponds to the least preferred element in the category under consideration. Every object in a category is evaluated relative to the corresponding reference point; this may distort the objective ranking of options across different categories, and thus possibly give rise to a context-effect bias. The resulting representation is essentially unique; furthermore, I show how to quantify the strength of the behavioral bias from choice data. I also provide two economic applications of the preferences that we axiomatize to principal agent models and to qualifying auctions.;Chapter two studies an extension of the model of choices from categories affected by a context effects bias, whose axiomatic foundations are provided in chapter one. I study here the case when besides the reference dependent bias effect there is also a concern for flexibility in the spirit of the literature initiated by Kreps(1979) and Dekel, Lipman and Rustichini(2001). More precisely, I analyze the case in which I allow for the presence of some underlying uncertainty between the moment of the choice of the menu and the moment of the choice of a specific option from within the menu. Allowing for uncertainty between the two stages makes sense especially in those applications in which there is some cost of switching between menus and the choice of the specific element from the menu is made either significantly later or repeatedly over a long period of time.;Chapter three studies information acquisition under competitive pressure and proposes a model to examine the question regarding the shape of the relationship between competition and the level of innovative activity in an industry. This question was raised for the first time by Schumpeter (1943) and although many answers have been proposed, recent empirical papers point to an inverted-U shape relationship between competition and innovation. My paper will offer theoretical support to these empirical results by employing a different force than the previous literature; this will allow for a more correct definition of innovation. The firms in my dynamic model become sequentially aware of an invention and decide on whether and when to undertake a costly investment in innovation. In taking this decision, the firms face a trade-off between a first-mover advantage and waiting to acquire more information. The model is successful at supporting some of the additional empirical regularities previously observed. The closed-form solution of the equilibrium I compute allows for an empirical testing of our results and thus makes the model amenable for further applications.