Working Paper: NBER ID: w10151
Authors: Manuel Amador; Ivn Werning; Georgemarios Angeletos
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), which nests 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: No keywords provided
JEL Codes: H0; O0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| strength of temptation (D91) | optimal minimum savings level (D14) |
| optimal minimum savings level (D14) | flexibility (J62) |
| strength of temptation (D91) | policy requirements (G52) |
| temptation levels (Y60) | optimal policy outcomes (D78) |
| minimum savings policies (D14) | overconsumption (E21) |
| temptation (Y60) | optimal allocation (D61) |