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Commitment vs. Flexibility

  • Manuel Amador
  • George-Marios Angeletos
  • Ivan Werning

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.

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Date of creation: 2004
Date of revision:
Handle: RePEc:red:sed004:87
Contact details of provider: Postal: Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA
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  1. Andrew Caplin & John Leahy, 2004. "The Social Discount Rate," Journal of Political Economy, University of Chicago Press, vol. 112(6), pages 1257-1268, December.
  2. Martin Feldstein, 1982. "The Optimal Level of Social Security Benefits," NBER Working Papers 0970, National Bureau of Economic Research, Inc.
  3. Eddie Dekel, 1997. "A Unique Subjective State Space for Unforeseen Contingencies," Discussion Papers 1202, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  4. Cole, Harold L & Kocherlakota, Narayana R, 2001. "Efficient Allocations with Hidden Income and Hidden Storage," Review of Economic Studies, Wiley Blackwell, vol. 68(3), pages 523-42, July.
  5. Faruk Gul & Wolfgang Pesendorfer, 2003. "Self-control, revealed preference and consumption choice," Levine's Working Paper Archive 506439000000000362, David K. Levine.
  6. M. L. Weitzman, 1973. "Prices vs. Quantities," Working papers 106, Massachusetts Institute of Technology (MIT), Department of Economics.
  7. Faruk Gul & Wolfgang Pesendorfer, 2001. "Temptation and Self-Control," Econometrica, Econometric Society, vol. 69(6), pages 1403-1435, November.
  8. Diamond, P. A., 1977. "A framework for social security analysis," Journal of Public Economics, Elsevier, vol. 8(3), pages 275-298, December.
  9. Eytan Sheshinski, 2000. "Bounded Rationality and Socially Optimal Limits on Choice in a Self-Selection Model," Discussion Paper Series dp330, The Federmann Center for the Study of Rationality, the Hebrew University, Jerusalem, revised Nov 2002.
  10. Per Krusell & Burhanettin Kuruscu & Anthony A. Smith, Jr., 2000. "Temptation and Taxation," GSIA Working Papers 2001-12, Carnegie Mellon University, Tepper School of Business.
  11. Susan Athey & Andrew Atkeson & Patrick J. Kehoe, 2001. "On the optimality of transparent monetary policy," Working Papers 613, Federal Reserve Bank of Minneapolis.
  12. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, vol. 38(114), pages 175-208, April.
  13. Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414, June.
  14. repec:tpr:qjecon:v:118:y:2003:i:2:p:745-784 is not listed on IDEAS
  15. Laibson, David I., 1997. "Golden Eggs and Hyperbolic Discounting," Scholarly Articles 4481499, Harvard University Department of Economics.
  16. Diamond, Peter & Koszegi, Botond, 2003. "Quasi-hyperbolic discounting and retirement," Journal of Public Economics, Elsevier, vol. 87(9-10), pages 1839-1872, September.
  17. Atkeson, Andrew & Lucas, Robert E, Jr, 1992. "On Efficient Distribution with Private Information," Review of Economic Studies, Wiley Blackwell, vol. 59(3), pages 427-53, July.
  18. Ayse Imrohoroglu & Selahattin Imrohoroglu & Douglas H. Joines, 2000. "Time inconsistent preferences and Social Security," Discussion Paper / Institute for Empirical Macroeconomics 136, Federal Reserve Bank of Minneapolis.
  19. W. Pesendorfer & F. Gul, 1999. "Self-Control and the Theory of Consumption," Princeton Economic Theory Papers 99f2, Economics Department, Princeton University.
  20. Kocherlakota, Narayana R., 1996. "Reconsideration-Proofness: A Refinement for Infinite Horizon Time Inconsistency," Games and Economic Behavior, Elsevier, vol. 15(1), pages 33-54, July.
  21. Laibson, David, 1998. "Life-cycle consumption and hyperbolic discount functions," European Economic Review, Elsevier, vol. 42(3-5), pages 861-871, May.
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