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On the Design of an Optimal Transfer Schedule with Time Inconsistent Preferences

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  • Campo, Juan Carlos Chavez-Martin del

Abstract

This paper incorporates the phenomenon of time inconsistency into the problem of designing an optimal transfer schedule. It is shown that if program bene ciaries are time inconsistent and receive all of the resources in just one payment, then the equilibrium allocation is always inecient. In the spirit of the second welfare theorem, we show that any ecient allocation can be ob- tained in equilibrium when the policymaker has full information. This assump- tion is relaxed by introducing uncertainty and asymmetric information into the model. The optimal solution reflects the dilemma that a policymaker has to face when playing the roles of commitment enforcer and insurance provider simultaneously.

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Bibliographic Info

Paper provided by Cornell University, Department of Applied Economics and Management in its series Working Papers with number 127040.

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Date of creation: 2006
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Handle: RePEc:ags:cudawp:127040

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Related research

Keywords: Time Inconsistency; Transfer Schedule; Hyperbolic Discounting; Self- Control Problems; Consumption; Uncertainty.; Agricultural and Food Policy; D910; H390; H550;

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  1. Nava Ashaf & Dean Karlan & Wesley Yin, 2004. "Tying odysseus to the mast: Evidence from a commitment savings product in the philippines," Natural Field Experiments 00206, The Field Experiments Website.
  2. Shapiro, Jesse M., 2005. "Is there a daily discount rate? Evidence from the food stamp nutrition cycle," Journal of Public Economics, Elsevier, vol. 89(2-3), pages 303-325, February.
  3. Brito, Dagobert L. & Hamilton, Jonathan H. & Slutsky, Steven M. & Stiglitz, Joseph E., 1991. "Dynamic optimal income taxation with government commitment," Journal of Public Economics, Elsevier, vol. 44(1), pages 15-35, February.
  4. Laibson, David, 1998. "Life-cycle consumption and hyperbolic discount functions," European Economic Review, Elsevier, vol. 42(3-5), pages 861-871, May.
  5. Hopenhayn, H. & Nicolini, P.J., 1996. "Optimal Unemployment Insurance," RCER Working Papers 421, University of Rochester - Center for Economic Research (RCER).
  6. O'Donoghue, Ted & Rabin, Matthew, 2000. "Choice and Procrastination," Department of Economics, Working Paper Series qt5r26k54p, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  7. Thomas, Jonathan & Worrall, Tim, 1990. "Income fluctuation and asymmetric information: An example of a repeated principal-agent problem," Journal of Economic Theory, Elsevier, vol. 51(2), pages 367-390, August.
  8. Ravi Kanbur & Jukka Pirttilä & Matti Tuomala, 2004. "Non-Welfarist Optimal Taxation and Behavioral Public Economics," CESifo Working Paper Series 1291, CESifo Group Munich.
  9. Goldman, Steven M, 1980. "Consistent Plans," Review of Economic Studies, Wiley Blackwell, vol. 47(3), pages 533-37, April.
  10. Peleg, Bezalel & Yaari, Menahem E, 1973. "On the Existence of a Consistent Course of Action when Tastes are Changing," Review of Economic Studies, Wiley Blackwell, vol. 40(3), pages 391-401, July.
  11. Shane Frederick & George Loewenstein & Ted O'Donoghue, 2002. "Time Discounting and Time Preference: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 40(2), pages 351-401, June.
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