Promises, Promises, ..
AbstractWe 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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