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Credibility and endogenous societal discounting

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Author Info
Christopher Sleet (Carnegie Mellon University)
Sevin Yeltekin (Northwestern University)
Abstract

We consider a dynamic moral hazard economy inhabited by a planner and a population of privately informed agents. We assume that the planner and the agents share the same discount factor, but that the planner cannot commit. We show that optimal allocations in such settings solve the problems of committed planners who discount the future less heavily than agents. Thus, we provide micro-foundations for dynamic moral hazard models that assume a societal discount factor in excess of the private one. We extend the analysis to allocations that are reconsideration-proof in the sense of Kocherlakota (1996). We show that these allocations solve the choice problem of a committed planner with a unit discount factor. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/j.red.2006.03.001
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Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 9 (2006)
Issue (Month): 3 (July)
Pages: 410-437
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Handle: RePEc:red:issued:05-139

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Related research
Keywords: Credibility; Commitment; Dynamic private information; Social insurance;

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Find related papers by JEL classification:
D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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  1. Stefania Albanesi & Roc Armenter, 2007. "Intertemporal Distortions in the Second Best," Discussion Papers 0708-08, Columbia University, Department of Economics. [Downloadable!]
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