Status Quo Bias with Choice Overload

This paper proposes a parsimonious model that captures status quo bias, the reference effect and choice overload, where choice overload can be understood as the increase in intensity of status quo bias when the menu becomes larger. Our decision maker follows a two-step procedure. She first limits consideration to alternatives that weakly dominate the status quo according to a menu-dependent list of attributes. Then, she maximizes preference over this subset of alternatives, with tie breaking in favor of the status quo. Choice overload is generated by the key feature that the list of attributes is increasing in menu size. An axiomatic characterization and two applications are provided. In particular, a policy maker must nudge the agent through a series of small changes in her choice problems due to the presence of choice overload. Moreover, an incumbent firm can deter entry by exploiting choice overload