Commitment vs. Flexibility

Manuel Amador, George-Marios Angeletos () and Iván Werning

No 87, 2004 Meeting Papers from Society for Economic Dynamics

Abstract: 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.

Keywords: commitment; temptation; flexibility; minimum savings; social security; dynamic mechanism design; hyperbolic discounting (search for similar items in EconPapers)
JEL-codes: D82 E21 E61 D91 (search for similar items in EconPapers)
Date: Written
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Related works:
Working Paper: Commitment Vs. Flexibility (2003)
Journal Article: Commitment vs. Flexibility (2006)
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Persistent link: http://EconPapers.repec.org/RePEc:red:sed004:87

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