Banking Regulation and Costless Commitment Contracts for Time-Inconsistent Agents

Carolina Laureti and Ariane Szafarz

No 23-010, Working Papers CEB from ULB -- Universite Libre de Bruxelles

Abstract: Behavioral economics modelling 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: 2023-11-24
New Economics Papers: this item is included in nep-ban
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Journal Article: Banking regulation and costless commitment contracts for time-inconsistent agents (2023)
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