Credibility and Endogenous Societal Discounting

Christopher Sleet and Sevin Yeltekin ()

No 2006-E38, GSIA Working Papers from Carnegie Mellon University, Tepper School of Business

Abstract: We consider a dynamic moral hazard economy inhabited by a planner and a population of privately informed agents. We assume that the planner and the agents share the same discount factor, but that the planner cannot commit. We show that optimal allocations in such settings solve the problems of committed planners who discount the future less heavily than agents. Thus, we provide micro- foundations for dynamic moral hazard models that assume a societal discount factor in excess of the private one. We extend the analysis to allocations that are reconsideration-proof in the sense of Kocherlakota (1996). We show that these allocations solve the choice problem of a committed planner with a unit discount factor.

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Journal Article: Credibility and endogenous societal discounting (2006)
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