Commitment vs. flexibility
By: Manuel Amador, Ivan Werning [and] George Marios Angeletos
Contributors: Werning, Ivǹ; Angeletos, Marios; Massachusetts Institute of Technology. Dept. of Economics
Series: Working paper series / Massachusetts Institute of Technology, Dept. of Economics -- working paper 03-40; Working paper (Massachusetts Institute of Technology. Dept. of Economics) -- no. 03-40.
Publisher: Massachusetts Institute of Technology, Dept. of Economics
Published: 2003
Place of publication: Cambridge, MA
Language: eng
Number of pages: 42
Other titles: Commitment versus flexibility
Description: 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), which nests 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. Keywords: Banking and credit, English Industrial Revolution, interest rate determination, credit rationing, technological change and learning. JEL Classifications: D82, E21, E61, D91, H55.
Notes: "November 15, 2003."

Includes bibliographical references (p. 40-42).

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