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Promises, Promises, ..

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  • Juan D. Carrillo
  • Mathias Dewatripont

Abstract

We consider a hyperbolic discounting individual who has the ability to make promises which are costly to break. We first identify conditions under which promises made are kept, and conditions under which they are (partially) broken. Second, we provide microeconomic foundations for the effectiveness of contractual promises. Specifically, we show how the cost of breaking promises can be reinterpreted in terms of either a reputation loss in the presence of incomplete information or a financial loss under monitoring and explicit contracting. The results imply that strategic interactions between hyperbolic discounting individuals may serve as a commitment mechanism against intrapersonal conflicts. Copyright (C) The Author(s). Journal compilation (C) Royal Economic Society 2008.

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Paper provided by UCLA Department of Economics in its series Levine's Bibliography with number 172782000000000058.

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Date of creation: 05 Apr 2005
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Handle: RePEc:cla:levrem:172782000000000058

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  3. Loewenstein, George, 1996. "Out of Control: Visceral Influences on Behavior," Organizational Behavior and Human Decision Processes, Elsevier, Elsevier, vol. 65(3), pages 272-292, March.
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  9. Loewenstein, George & Prelec, Drazen, 1992. "Anomalies in Intertemporal Choice: Evidence and an Interpretation," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 107(2), pages 573-97, May.
  10. Bénabou, Roland & Tirole, Jean, 2000. "Self-Confidence: Intrapersonal Strategies," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2580, C.E.P.R. Discussion Papers.
  11. Laffont, Jean-Jacques & Tirole, Jean, 1988. "The Dynamics of Incentive Contracts," Econometrica, Econometric Society, Econometric Society, vol. 56(5), pages 1153-75, September.
  12. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, Elsevier, vol. 3(4), pages 305-360, October.
  13. Bengt Holmstrom, 1999. "Managerial Incentive Problems: A Dynamic Perspective," NBER Working Papers 6875, National Bureau of Economic Research, Inc.
  14. Mathias Dewatripont & Eric Maskin, 1995. "Credit and efficiency in centralized and decentralized economies," ULB Institutional Repository 2013/9603, ULB -- Universite Libre de Bruxelles.
  15. Tore Ellingsen & Magnus Johannesson, 2004. "Is There a Hold-up Problem?," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 106(3), pages 475-494, October.
  16. Carrillo, Juan D & Mariotti, Thomas, 2000. "Strategic Ignorance as a Self-Disciplining Device," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 67(3), pages 529-44, July.
  17. Akerlof, George A, 1991. "Procrastination and Obedience," American Economic Review, American Economic Association, American Economic Association, vol. 81(2), pages 1-19, May.
  18. Freixas, Xavier & Guesnerie, Roger & Tirole, Jean, 1985. "Planning under Incomplete Information and the Ratchet Effect," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 52(2), pages 173-91, April.
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Cited by:
  1. Hsiaw, Alice, 2013. "Goal-setting and self-control," Journal of Economic Theory, Elsevier, Elsevier, vol. 148(2), pages 601-626.
  2. Koch, Alexander K. & Nafziger, Julia & Suvorov, Anton & van de Ven, Jeroen, 2014. "Self-rewards and personal motivation," European Economic Review, Elsevier, Elsevier, vol. 68(C), pages 151-167.
  3. Edvardsson Björnberg, Karin, 2013. "Rational climate mitigation goals," Energy Policy, Elsevier, Elsevier, vol. 56(C), pages 285-292.
  4. Koch, Alexander K. & Nafziger, Julia, 2011. "Goals and Psychological Accounting," IZA Discussion Papers 5802, Institute for the Study of Labor (IZA).

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