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Promises, Promises…

  • Carrillo, Juan D
  • Dewatripont, Mathias

This Paper considers a time-inconsistent individual who has the ability to make promises that lead to a financial or reputation loss if broken. We first identify conditions under which promises made are kept, and conditions under which they are (partially) broken. Second, we endogenize the financial loss from breaking promises by considering interpersonal monitoring and explicit contracting. We describe optimal contracting under the assumptions that monitoring requires meeting and that meeting also opens the door to renegotiation of earlier promises. Third, we show how the loss from breaking promises can be reinterpreted in terms of reputation loss in the presence of incomplete information. Finally, we argue that the above results remain valid when we replace time-inconsistent preferences with limits to contracting as the source of the commitment problem of the individual. This significantly enhances the generality of these results.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2680.

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Date of creation: Jan 2001
Date of revision:
Handle: RePEc:cpr:ceprdp:2680
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  1. Rubinstein, A., 2000. "Is it "Economics and Psychology"?: the Case of Hyperbolic Discounting," Papers 2000-21, Tel Aviv.
  2. Dewatripont, M & Maskin, E, 1995. "Credit and Efficiency in Centralized and Decentralized Economies," Review of Economic Studies, Wiley Blackwell, vol. 62(4), pages 541-55, October.
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  5. Grossman, Sanford J & Hart, Oliver D, 1983. "An Analysis of the Principal-Agent Problem," Econometrica, Econometric Society, vol. 51(1), pages 7-45, January.
  6. Brocas, Isabelle & Carrillo, Juan D., 2000. "The value of information when preferences are dynamically inconsistent," European Economic Review, Elsevier, vol. 44(4-6), pages 1104-1115, May.
  7. Thaler, Richard, 1981. "Some empirical evidence on dynamic inconsistency," Economics Letters, Elsevier, vol. 8(3), pages 201-207.
  8. Roland Benabou & Jean Tirole, 1999. "Self-Confidence: Intrapersonal Strategies," Working Papers 152, Princeton University, Woodrow Wilson School of Public and International Affairs, Discussion Papers in Economics..
  9. Aghion, Philippe & Tirole, Jean, 1997. "Formal and Real Authority in Organizations," Journal of Political Economy, University of Chicago Press, vol. 105(1), pages 1-29, February.
  10. H. M. Shefrin & Richard Thaler, 1977. "An Economic Theory of Self-Control," NBER Working Papers 0208, National Bureau of Economic Research, Inc.
  11. Laibson, David I., 1997. "Golden Eggs and Hyperbolic Discounting," Scholarly Articles 4481499, Harvard University Department of Economics.
  12. Jean-Jacques Laffont & Jean Tirole, 1985. "The Dynamics of Incentive Contracts," Working papers 397, Massachusetts Institute of Technology (MIT), Department of Economics.
  13. repec:oup:qjecon:v:114:y:1999:i:3:p:769-816 is not listed on IDEAS
  14. repec:oup:qjecon:v:107:y:1992:i:2:p:573-97 is not listed on IDEAS
  15. Loewenstein, George, 1996. "Out of Control: Visceral Influences on Behavior," Organizational Behavior and Human Decision Processes, Elsevier, vol. 65(3), pages 272-292, March.
  16. repec:oup:qjecon:v:112:y:1997:i:2:p:443-77 is not listed on IDEAS
  17. repec:oup:restud:v:62:y:1995:i:4:p:541-55 is not listed on IDEAS
  18. repec:oup:restud:v:66:y:1999:i:1:p:169-82 is not listed on IDEAS
  19. Holmstrom, Bengt, 1999. "Managerial Incentive Problems: A Dynamic Perspective," Review of Economic Studies, Wiley Blackwell, vol. 66(1), pages 169-82, January.
  20. Tore Ellingsen & Magnus Johannesson, 2004. "Is There a Hold-up Problem?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 106(3), pages 475-494, October.
  21. Akerlof, George A, 1991. "Procrastination and Obedience," American Economic Review, American Economic Association, vol. 81(2), pages 1-19, May.
  22. repec:oup:restud:v:67:y:2000:i:3:p:529-44 is not listed on IDEAS
  23. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
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