Commitment, Flexibility and Optimal Screening of Time Inconsistency

Simone Galberti

Discussion Papers from Northwestern University, Center for Mathematical Studies in Economics and Management Science

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.

Keywords: Time inconsistency; self-control; commitment; exibility; contracts; screen- ing; unused items. JEL Classification Numbers:D42; D62; D82; D86; D91; G21; G23 (search for similar items in EconPapers)
Date: 2012-10-01
New Economics Papers: this item is included in nep-cta
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