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Commitment, Flexibility, and Optimal Screening of Time Inconsistency

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  • Simone Galperti

Abstract

This paper develops a theory of optimal provision of commitment devices to people who value both commitment and flexibility and whose preferences differ in the degree of time inconsistency. If time inconsistency is observable, both a planner and a monopolist provide devices that help each person commit to the efficient level of flexibility. However, the combination of unobservable time inconsistency and preference for flexibility causes an adverse‐selection problem. To solve this problem, the monopolist and (possibly) the planner curtail flexibility in the device for a more inconsistent person at both ends of the efficient choice range; moreover, they may have to add unused options to the device for a less inconsistent person and also distort his actual choices. This theory has normative and positive implications for private and public provision of commitment devices.

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  • Simone Galperti, 2015. "Commitment, Flexibility, and Optimal Screening of Time Inconsistency," Econometrica, Econometric Society, vol. 83(4), pages 1425-1465, July.
    • Handle: RePEc:wly:emetrp:v:83:y:2015:i:4:p:1425-1465
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    Cited by:

    1. Raphael Brade & Oliver Himmler & Robert Jaeckle & Philipp Weinschenk, 2024. "Helping Students to Succeed – The Long-Term Effects of Soft Commitments and Reminders," CESifo Working Paper Series 11001, CESifo.
    2. Johannes Johnen, 2019. "Automatic‐renewal contracts with heterogeneous consumer inertia," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 28(4), pages 765-786, November.
    3. Cetemen, Doruk & Feng, Felix Zhiyu & Urgun, Can, 2023. "Renegotiation and dynamic inconsistency: Contracting with non-exponential discounting," Journal of Economic Theory, Elsevier, vol. 208(C).
    4. Michael Grubb, 2015. "Behavioral Consumers in Industrial Organization: An Overview," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 47(3), pages 247-258, November.
    5. Michael D. Grubb, 2015. "Behavioral Consumers in Industrial Organization," Boston College Working Papers in Economics 879, Boston College Department of Economics.
    6. Christensen, Else Gry Bro & Nafziger, Julia, 2016. "Packaging of sin goods – Commitment or exploitation?," Journal of Economic Behavior & Organization, Elsevier, vol. 122(C), pages 62-74.
    7. Laureti, Carolina & Szafarz, Ariane, 2023. "Banking regulation and costless commitment contracts for time-inconsistent agents," Economic Modelling, Elsevier, vol. 129(C).
    8. Ferraz, Eduardo & Mantilla, Cesar, 2022. "A trade-off from the future: How risk aversion may explain the demand for illiquid assets," OSF Preprints xbsn8, Center for Open Science.
    9. Galperti, Simone, 2019. "A theory of personal budgeting," Theoretical Economics, Econometric Society, vol. 14(1), January.
    10. Yu, Pei Cheng, 2020. "Seemingly exploitative contracts," Journal of Economic Behavior & Organization, Elsevier, vol. 176(C), pages 299-320.
    11. Clayton, Christopher & Schaab, Andreas, 2022. "A Theory of Dynamic Inflation Targets," TSE Working Papers 22-1389, Toulouse School of Economics (TSE).
    12. Fang, Hanming & Wu, Zenan, 2020. "Life insurance and life settlement markets with overconfident policyholders," Journal of Economic Theory, Elsevier, vol. 189(C).
    13. Youichiro Higashi & Kazuya Hyogo & Gil Riella, 2020. "Dynamically Consistent Menu Preferences," KIER Working Papers 1047, Kyoto University, Institute of Economic Research.
    14. Radoslaw Paluszynski & Pei Cheng Yu, "undated". "Optimal Taxation with Risky Human Capital and Retirement Savings," Discussion Papers 2019-05, School of Economics, The University of New South Wales.
    15. Doruk Cetemen & Felix Zhiyu Feng & Can Urgun, 2019. "Contracting with Non-Exponential Discounting: Moral Hazard and Dynamic Inconsistency," Working Papers 2019-17, Princeton University. Economics Department..
    16. Paul Heidhues & Botond Kőszegi, 2017. "Naïveté-Based Discrimination," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 132(2), pages 1019-1054.
    17. Mariana Carrera & Heather Royer & Mark Stehr & Justin Sydnor & Dmitry Taubinsky, 2022. "Who Chooses Commitment? Evidence and Welfare Implications," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 89(3), pages 1205-1244.
    18. Moser, Christian & Olea de Souza e Silva, Pedro, 2019. "Optimal Paternalistic Savings Policies," MPRA Paper 95383, University Library of Munich, Germany.
    19. Florian Englmaier & Matthias Fahn & Marco A. Schwarz, 2016. "Long-Term Employment Relations when Agents are Present Biased," CESifo Working Paper Series 6159, CESifo.
    20. Habibi, Amir, 2020. "Motivation and information design," Journal of Economic Behavior & Organization, Elsevier, vol. 169(C), pages 1-18.
    21. Heidhues, Paul & Köszegi, Botond, 2018. "Behavioral Industrial Organization," CEPR Discussion Papers 12988, C.E.P.R. Discussion Papers.
    22. Beshears, John & Choi, James J. & Harris, Christopher & Laibson, David & Madrian, Brigitte C. & Sakong, Jung, 2020. "Which early withdrawal penalty attracts the most deposits to a commitment savings account?," Journal of Public Economics, Elsevier, vol. 183(C).
    23. Matteo Foschi, 2016. "Temptation in Markets with no Commitment: Give-aways, Scare-aways and Reversals," Discussion Papers in Economics 16/12, Division of Economics, School of Business, University of Leicester.

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