Commitment Vs. Flexibility
AbstractThis paper studies the optimal trade-off between commitment and flexibility in an intertemporal consumption/savings choice model. Individuals expect to receive relevant information regarding their own situation and tastes - generating a value for flexibility - but also expect to suffer from temptations - generating a value for commitment. The model combines the representations of preferences for flexibility introduced by Kreps (1979) with its recent antithesis for commitment proposed by Gul and Pesendorfer (2002), which nests the hyperbolic discounting model. We set up and solve a mechanism design problem that optimizes over the set of consumption/saving options available to the individual each period. We characterize the conditions under which the solution takes a simple threshold form where minimum savings policies are optimal. Our analysis is also relevant for other issues such as situations with externalities or the problem faced by a 'paternalistic' planner, which may be important for thinking about some regulations such as forced minimum schooling laws.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10151.
Date of creation: Dec 2003
Date of revision:
Publication status: published as Manuel Amador & Iván Werning & George-Marios Angeletos, 2006. "Commitment vs. Flexibility," Econometrica, Econometric Society, vol. 74(2), pages 365-396, 03.
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