Commitment vs. Flexibility

43 Pages Posted: 30 Nov 2003

See all articles by Manuel Amador

Manuel Amador

affiliation not provided to SSRN

Iván Werning

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)

George-Marios Angeletos

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)

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Date Written: November 15, 2003

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: Banking and credit, English Industrial Revolution, interest rate determination, credit rationing, technological change and learning.

JEL Classification: D82, E21, E61, D91, H55

Suggested Citation

Amador, Manuel and Werning, Ivan and Angeletos, George-Marios, Commitment vs. Flexibility (November 15, 2003). Available at SSRN: https://ssrn.com/abstract=471822 or http://dx.doi.org/10.2139/ssrn.471822

Manuel Amador

affiliation not provided to SSRN

Ivan Werning (Contact Author)

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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HOME PAGE: http://econ-www.mit.edu/faculty/iwerning

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
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George-Marios Angeletos

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

50 Memorial Drive
Room E52-251b
Cambridge, MA 02142
United States
617-452-3859 (Phone)
617-253-1330 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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