On the Benefits of Time-Inconsistent Preferences

Abstract

Why are time-inconsistent preferences widespread among decision makers? This paper provides a possible explanation by showing that time-inconsistent preferences could be beneficial for decision makers that work together. Time-inconsistent preferences – which are usually blamed for having detrimental effects – can thus be advantageous for the functioning of societies. We further show that decision makers with time-inconsistent preferences are better off if they are naive rather than sophisticated concerning their inconsistency. The results do not depend on the construction of contracts or punishment schemes.

Keywords: time-inconsistent preferences, teams, sophistication, naivete

JEL Classification: D82, D90