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How to commit (if you must): Commitment contracts and the dual-self model

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  • Peysakhovich, Alexander

Abstract

This paper studies how dual-self (Fudenberg and Levine, 2006) decision-makers can use commitment technologies to combat temptation and implement long-run optimal actions. I consider three types of commitment technologies: carrot contracts (rewards for ‘good’ behavior financed by borrowing from future consumption), stick contracts (self imposed fines for ‘bad’ behavior) and binding commitment. I compare the welfare implications of these contracts and show that dual-self decision-makers strictly prefer to use carrots instead of either sticks or binding commitments. This is for several reasons: sticks are highly vulnerable to trembles (while carrots are not), sticks and binding commitments create a temptation to cancel them (while carrots do not), and finally carrots allow easy tradeoffs between commitment and flexibility (while sticks and binding commitments do not).

Suggested Citation

  • Peysakhovich, Alexander, 2014. "How to commit (if you must): Commitment contracts and the dual-self model," Journal of Economic Behavior & Organization, Elsevier, vol. 101(C), pages 100-112.
    • Handle: RePEc:eee:jeborg:v:101:y:2014:i:c:p:100-112
    DOI: 10.1016/j.jebo.2014.02.003
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    References listed on IDEAS

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    2. Christine L. Exley & Jeffrey K. Naecker, 2017. "Observability Increases the Demand for Commitment Devices," Management Science, INFORMS, vol. 63(10), pages 3262-3267, October.

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