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Time Consistency in Dynamic Bargaining: The Role of Committees as Substitutes for Commitment

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  • Alessandro Riboni
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    \QTR{it}{The standard framework to study time consistency assumes that economic decisions are made by one legislator. In this paper policies are negotiated in a committee by playing a dynamic voting game. The implications of this change are remarkable: the social optimum becomes time consistent. While concentration of powers in a single legislator creates credibility problems, we show that separation of powers yields commitment. The main focus of the paper is on the time consistency of monetary policy when decisions are made in a monetary committee, such as the F.O.M.C. or the European Central Bank. We prove that making decisions inside a committee works as a substitute for a commitment technology. Notice that this result may hold even when }$all$\QTR{it}{\ legislators in the committee have a one-shot incentive to deviate from the ex-ante optimal plan. Last, we provide normative prescriptions regarding the identity of the agenda setter and the location of the initial status quo necessary to implement the utilitarian optimum

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    Paper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number 684.

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    Date of creation: 2004
    Handle: RePEc:red:sed004:684
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    Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

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