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Commitment, Flexibility and Optimal Screening of Time Inconsistency

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  • Simone Galberti

Abstract

I study the optimal supply of exible commitment devices to people who value both commitment and exibility, and whose preferences exhibit varying degrees of time incon- sistency. I nd that, if time inconsistency is observable, then both a monopolist and a planner supply devices that enable each person to commit to the e¢ cient level of exi- bility. If instead time inconsistency is unobservable, then both face a screening problem. To screen a more time-inconsistent from a less time-inconsistent person, the monopolist and (possibly) the planner ine¢ ciently curtail the exibility of the device tailored to the rst person, and include unused options in the device tailored to the second person. These results have important policy implications for designing special savings devices that use tax incentives to help time-inconsistent people adequately save for retirement.

Suggested Citation

  • Simone Galberti, 2012. "Commitment, Flexibility and Optimal Screening of Time Inconsistency," Discussion Papers 1520, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  • Handle: RePEc:nwu:cmsems:1520
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    Keywords

    Time inconsistency; self-control; commitment; exibility; contracts; screen- ing; unused items. JEL Classification Numbers:D42; D62; D82; D86; D91; G21; G23;

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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