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), 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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number 87.
Date of creation: 2004
Date of revision:
Contact details of provider:
Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
Web page: http://www.EconomicDynamics.org/society.htm
More information through EDIRC
commitment; temptation; flexibility; minimum savings; social security; dynamic mechanism design; hyperbolic discounting;
Other versions of this item:
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
- E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
- D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-08-02 (All new papers)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Eddie Dekel, 1997.
"A Unique Subjective State Space for Unforeseen Contingencies,"
1202, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Dekel, Eddie & Lipman, Barton L & Rustichini, Aldo, 2001. "Representing Preferences with a Unique Subjective State Space," Econometrica, Econometric Society, vol. 69(4), pages 891-934, July.
- M. L. Weitzman, 1973.
"Prices vs. Quantities,"
106, Massachusetts Institute of Technology (MIT), Department of Economics.
- Atkeson, Andrew & Lucas, Robert E, Jr, 1992.
"On Efficient Distribution with Private Information,"
Review of Economic Studies,
Wiley Blackwell, vol. 59(3), pages 427-53, July.
- Andrew Atkeson & Robert E Lucas, 2010. "On Efficient Distribution with Private Information," Levine's Working Paper Archive 2179, David K. Levine.
- Eytan Sheshinski, 2000.
"Bounded Rationality and Socially Optimal Limits on Choice in a Self-Selection Model,"
Discussion Paper Series
dp330, The Center for the Study of Rationality, Hebrew University, Jerusalem, revised Nov 2002.
- Eytan Sheshinski, 2003. "Bounded Rationality and Socially Optimal Limits on Choice in a Self-Selection Model," CESifo Working Paper Series 868, CESifo Group Munich.
- Faruk Gul & Wolfgang Pesendorfer, 2001.
"Temptation and Self-Control,"
Econometric Society, vol. 69(6), pages 1403-1435, November.
- Ayse Imrohoroglu & Selahattin Imrohoroglu & Douglas H. Joines, 2000.
"Time inconsistent preferences and Social Security,"
Discussion Paper / Institute for Empirical Macroeconomics
136, Federal Reserve Bank of Minneapolis.
- Cole, Harold L & Kocherlakota, Narayana R, 2001.
"Efficient Allocations with Hidden Income and Hidden Storage,"
Review of Economic Studies,
Wiley Blackwell, vol. 68(3), pages 523-42, July.
- Harold L Cole & Narayana Kocherlakota, 2010. "Efficient Allocations with Hidden Income and Hidden Storage," Levine's Working Paper Archive 1909, David K. Levine.
- Harold L. Cole & Narayana R. Kocherlakota, 1999. "Efficient allocations with hidden income and hidden storage," Staff Report 238, Federal Reserve Bank of Minneapolis.
- W. Pesendorfer & F. Gul, 1999.
"Self-Control and the Theory of Consumption,"
Princeton Economic Theory Papers
99f2, Economics Department, Princeton University.
- Andrew Caplin & John Leahy, 2004.
"The Social Discount Rate,"
Journal of Political Economy,
University of Chicago Press, vol. 112(6), pages 1257-1268, December.
- Andrew Caplin & John Leahy, 2000. "The Social Discount Rate," NBER Working Papers 7983, National Bureau of Economic Research, Inc.
- Andrew Caplin & John Leahy, 2001. "The social discount rate," Discussion Paper / Institute for Empirical Macroeconomics 137, Federal Reserve Bank of Minneapolis.
- Kocherlakota, Narayana R., 1996. "Reconsideration-Proofness: A Refinement for Infinite Horizon Time Inconsistency," Games and Economic Behavior, Elsevier, vol. 15(1), pages 33-54, July.
- Laibson, David, 1998. "Life-cycle consumption and hyperbolic discount functions," European Economic Review, Elsevier, vol. 42(3-5), pages 861-871, May.
- Laibson, David I., 1997.
"Golden Eggs and Hyperbolic Discounting,"
4481499, Harvard University Department of Economics.
- Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, vol. 38(114), pages 175-208, April.
- Martin Feldstein, 1986.
"The Optimal Level of Social Security Benefits,"
NBER Working Papers
0970, National Bureau of Economic Research, Inc.
- Per Krusell & Burhanettin Kuruscu & Anthony A. Smith, Jr., 2000.
"Temptation and Taxation,"
GSIA Working Papers
2001-12, Carnegie Mellon University, Tepper School of Business.
- Diamond, Peter & Koszegi, Botond, 2003. "Quasi-hyperbolic discounting and retirement," Journal of Public Economics, Elsevier, vol. 87(9-10), pages 1839-1872, September.
- Faruk Gul & Wolfgang Pesendorfer, 2003.
"Self-control, revealed preference and consumption choice,"
Levine's Working Paper Archive
506439000000000362, David K. Levine.
- 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.
- Diamond, P. A., 1977. "A framework for social security analysis," Journal of Public Economics, Elsevier, vol. 8(3), pages 275-298, December.
- Susan Athey & Andrew Atkeson & Patrick J. Kehoe, 2001. "On the optimality of transparent monetary policy," Working Papers 613, Federal Reserve Bank of Minneapolis.
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page. reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann).
If references are entirely missing, you can add them using this form.