Selling Self-Control

Abstract

This paper presents theoretical analysis on a monopolistic market selling commitment devices for solving self-control problems. The commitment contract increases the buyer’s non-compliance cost with a personal goal. When the buyer’s investment return is high, the optimal contracts achieve the first best, even with incomplete information. When it is low, asymmetric information leads to a second-best separating equilibrium in which the seller distorts the commitment contract for buyers with weak self-control and causes over-investment. Furthermore, we show that mandating sellers to use non-monetary penalty or to transfer penalty payments to third parties leads to more severe over-investment and reduces welfare.

Keywords: time inconsistency, self-control market, commitment device, penalty, screening, contract design

JEL Classification: D86, D91, L12