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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Paper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number
87.
Length: Date of creation: 2004 Date of revision: Handle: RePEc:red:sed004:87
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Manuel Amador & Ivan Werning & George-Marios Angeletos, 2003.
"Commitment Vs. Flexibility,"
NBER Working Papers
10151, National Bureau of Economic Research, Inc.
[Downloadable!] (restricted)
Find related papers by JEL classification: D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information 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
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Eddie Dekel & Barton Lipman & Aldo Rustichini, 2006.
"Temptation–Driven Preferences,"
Discussion Papers
1423, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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David Backus & Bryan Routledge & Stanley Zin, 2004.
"Exotic Preferences for Macroeconomists,"
Working Papers
04-20, New York University, Leonard N. Stern School of Business, Department of Economics.
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David K. Backus & Bryan R. Routledge & Stanley E. Zin, 2005.
"Exotic Preferences for Macroeconomists,"
NBER Chapters,
in: NBER Macroeconomics Annual 2004, Volume 19, pages 319-414
National Bureau of Economic Research, Inc.
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