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On the Design of an Optimal Transfer Schedule with Time Inconsistent Preferences

  • Campo, Juan Carlos Chavez-Martin del

This paper incorporates the phenomenon of time inconsistency into the problem of designing an optimal transfer schedule. It is shown that if program bene ciaries are time inconsistent and receive all of the resources in just one payment, then the equilibrium allocation is always inecient. In the spirit of the second welfare theorem, we show that any ecient allocation can be ob- tained in equilibrium when the policymaker has full information. This assump- tion is relaxed by introducing uncertainty and asymmetric information into the model. The optimal solution reflects the dilemma that a policymaker has to face when playing the roles of commitment enforcer and insurance provider simultaneously.

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File URL: http://purl.umn.edu/127040
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Paper provided by Cornell University, Department of Applied Economics and Management in its series Working Papers with number 127040.

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Date of creation: 2006
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Handle: RePEc:ags:cudawp:127040
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  1. Nava Ashraf & Dean Karlan & Wesley Yin, 2006. "Tying Odysseus to the Mast: Evidence from a Commitment Savings Product in the Philippines," The Quarterly Journal of Economics, MIT Press, vol. 121(2), pages 635-672, May.
  2. Laibson, David, 1998. "Life-cycle consumption and hyperbolic discount functions," European Economic Review, Elsevier, vol. 42(3-5), pages 861-871, May.
  3. Ted O' Donoghue and Matthew Rabin., 2000. "Choice and Procrastination," Economics Working Papers E00-281, University of California at Berkeley.
  4. Brito, D.L. & Hamilton, J.H. & Slutsky, S.H. & Stiglitz, J.E., 1989. "Dynamic Optimal Income Taxation With Government Commitment," Papers 89-8, Florida - College of Business Administration.
  5. Kanbur, Ravi & Pirttila, Jukka & Tuomala, Matti, 2004. "Non-Welfarist Optimal Taxation And Behavioral Public Economics," Working Papers 127150, Cornell University, Department of Applied Economics and Management.
  6. Shane Frederick & George Loewenstein & Ted O'Donoghue, 2002. "Time Discounting and Time Preference: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 40(2), pages 351-401, June.
  7. Goldman, Steven M, 1980. "Consistent Plans," Review of Economic Studies, Wiley Blackwell, vol. 47(3), pages 533-37, April.
  8. Hopenhayn, Hugo A & Nicolini, Juan Pablo, 1997. "Optimal Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 412-38, April.
  9. Thomas, Jonathan & Worrall, Tim, 1990. "Income fluctuation and asymmetric information: An example of a repeated principal-agent problem," Journal of Economic Theory, Elsevier, vol. 51(2), pages 367-390, August.
  10. Melvin Stephens Jr., 2002. "'3rd of tha Month': Do Social Security Recipients Smooth Consumption Between Checks?," NBER Working Papers 9135, National Bureau of Economic Research, Inc.
  11. Peleg, Bezalel & Yaari, Menahem E, 1973. "On the Existence of a Consistent Course of Action when Tastes are Changing," Review of Economic Studies, Wiley Blackwell, vol. 40(3), pages 391-401, July.
  12. Melvin Stephens Jr., 2002. "Paycheck Receipt and the Timing of Consumption," NBER Working Papers 9356, National Bureau of Economic Research, Inc.
  13. Jesse M. Shapiro, 2003. "Is there a Daily Discount Rate? Evidence from the Food Stamp Nutrition Cycle," Microeconomics 0304005, EconWPA, revised 21 Apr 2003.
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