Banking regulation and costless commitment contracts for time-inconsistent agents

Carolina Laureti and Ariane Szafarz

Economic Modelling, 2023, vol. 129, issue C

Abstract: Behavioral economics modeling assumes that the contractible commitments valued by sophisticated time-inconsistent agents come at a cost. This paper challenges this assumption by arguing that it disregards the benefits that providers derive from supplying commitment-based products. In our equilibrium model, the commitment embedded in an illiquid savings product is valuable to both market sides. Although sophisticated time-inconsistent agents value the commitment, they do not have to pay for contracting it. The necessary and sufficient conditions for having a costless commitment contract in the savings market combine strong liquidity constraints imposed on banks and the occurrence of harmful shocks. Our results have regulatory implications for social finance.

Keywords: Behavioral economics; Banking; Savings account; Liquidity premium; Time inconsistency; Commitment contract (search for similar items in EconPapers)
JEL-codes: D53 D91 E21 G21 G28 (search for similar items in EconPapers)
Date: 2023
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Working Paper: Banking Regulation and Costless Commitment Contracts for Time-Inconsistent Agents (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:129:y:2023:i:c:s0264999323003486

DOI: 10.1016/j.econmod.2023.106536

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