Commitment vs. Flexibility

46 Pages Posted: 23 Dec 2003 Last revised: 28 Sep 2022

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: December 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.

Suggested Citation

Amador, Manuel and Werning, Ivan and Angeletos, George-Marios, Commitment vs. Flexibility (December 2003). NBER Working Paper No. w10151, Available at SSRN: https://ssrn.com/abstract=478660

Manuel Amador

affiliation not provided to SSRN

Ivan Werning (Contact Author)

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

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National Bureau of Economic Research (NBER) ( email )

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George-Marios Angeletos

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

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Room E52-251b
Cambridge, MA 02142
United States
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617-253-1330 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States