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Commitment vs. Flexibility

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  • Manuel Amador
  • George-Marios Angeletos
  • Ivan Werning

Abstract

This 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), or alternatively, 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 Info

Paper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number 87.

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Date of creation: 2004
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Handle: RePEc:red:sed004:87

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Keywords: commitment; temptation; flexibility; minimum savings; social security; dynamic mechanism design; hyperbolic discounting;

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References

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  1. W. Pesendorfer & F. Gul, 1999. "Temptation and Self-Control," Princeton Economic Theory Papers, Economics Department, Princeton University 99f1, Economics Department, Princeton University.
  2. Dekel, Eddie & Lipman, Barton L & Rustichini, Aldo, 2001. "Representing Preferences with a Unique Subjective State Space," Econometrica, Econometric Society, Econometric Society, vol. 69(4), pages 891-934, July.
  3. Laibson, David I., 1997. "Golden Eggs and Hyperbolic Discounting," Scholarly Articles 4481499, Harvard University Department of Economics.
  4. Andrew Caplin & John Leahy, 2000. "The Social Discount Rate," NBER Working Papers 7983, National Bureau of Economic Research, Inc.
  5. M. L. Weitzman, 1973. "Prices vs. Quantities," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 106, Massachusetts Institute of Technology (MIT), Department of Economics.
  6. Per Krusell & Burhanettin Kuruscu & Anthony A. Smith, Jr., 2000. "Temptation and Taxation," GSIA Working Papers, Carnegie Mellon University, Tepper School of Business 2001-12, Carnegie Mellon University, Tepper School of Business.
  7. Ayse Imrohoroglu & Selahattin Imrohoroglu & Douglas H. Joines, 2003. "Time-Inconsistent Preferences And Social Security," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 118(2), pages 745-784, May.
  8. Martin Feldstein, 1982. "The Optimal Level of Social Security Benefits," NBER Working Papers 0970, National Bureau of Economic Research, Inc.
  9. W. Pesendorfer & F. Gul, 1999. "Self-Control and the Theory of Consumption," Princeton Economic Theory Papers, Economics Department, Princeton University 99f2, Economics Department, Princeton University.
  10. Faruk Gul & Wolfgang Pesendorfer, 2004. "Self Control, Revealed Preferences and Consumption Choice," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(2), pages 243-264, April.
  11. Harold L. Cole & Narayana R. Kocherlakota, 1999. "Efficient allocations with hidden income and hidden storage," Staff Report, Federal Reserve Bank of Minneapolis 238, Federal Reserve Bank of Minneapolis.
  12. Diamond, P. A., 1977. "A framework for social security analysis," Journal of Public Economics, Elsevier, Elsevier, vol. 8(3), pages 275-298, December.
  13. Eytan Sheshinski, 2000. "Bounded Rationality and Socially Optimal Limits on Choice in a Self-Selection Model," Discussion Paper Series, The Center for the Study of Rationality, Hebrew University, Jerusalem dp330, The Center for the Study of Rationality, Hebrew University, Jerusalem, revised Nov 2002.
  14. Atkeson, Andrew & Lucas, Robert E, Jr, 1992. "On Efficient Distribution with Private Information," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 59(3), pages 427-53, July.
  15. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 38(114), pages 175-208, April.
  16. Kocherlakota, Narayana R., 1996. "Reconsideration-Proofness: A Refinement for Infinite Horizon Time Inconsistency," Games and Economic Behavior, Elsevier, Elsevier, vol. 15(1), pages 33-54, July.
  17. Laibson, David, 1998. "Life-cycle consumption and hyperbolic discount functions," European Economic Review, Elsevier, Elsevier, vol. 42(3-5), pages 861-871, May.
  18. Diamond, Peter & Koszegi, Botond, 2003. "Quasi-hyperbolic discounting and retirement," Journal of Public Economics, Elsevier, Elsevier, vol. 87(9-10), pages 1839-1872, September.
  19. Sheshinski, Eytan, 2000. "Bounded Rationality and Socially Optimal Limits on Choice in A Self-Selection Model," MPRA Paper 56141, University Library of Munich, Germany, revised Nov 2002.
  20. Susan Athey & Andrew Atkeson & Patrick J. Kehoe, 2001. "On the optimality of transparent monetary policy," Working Papers, Federal Reserve Bank of Minneapolis 613, Federal Reserve Bank of Minneapolis.
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