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Promises, Promises, ..

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  • Juan D. Carrillo
  • Mathias Dewatripont

Abstract

This Paper considers a time-inconsistent individual who has the ability to make promises that lead to a financial or reputation loss if broken. We first identify conditions under which promises made are kept, and conditions under which they are (partially) broken. Second, we endogenize the financial loss from breaking promises by considering interpersonal monitoring and explicit contracting. We describe optimal contracting under the assumptions that monitoring requires meeting and that meeting also opens the door to renegotiation of earlier promises. Third, we show how the loss from breaking promises can be reinterpreted in terms of reputation loss in the presence of incomplete information. Finally, we argue that the above results remain valid when we replace time-inconsistent preferences with limits to contracting as the source of the commitment problem of the individual. This significantly enhances the generality of these results.
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Suggested Citation

  • Juan D. Carrillo & Mathias Dewatripont, 2005. "Promises, Promises, ..," Levine's Bibliography 172782000000000058, UCLA Department of Economics.
    • Handle: RePEc:cla:levrem:172782000000000058
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    File URL: http://www-rcf.usc.edu/~juandc/PDFpapers/wp-prom.pdf
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    Cited by:

    1. Schumacher, Heiner, 2016. "Insurance, self-control, and contract flexibility," European Economic Review, Elsevier, vol. 83(C), pages 220-232.
    2. David Laibson, 1997. "Golden Eggs and Hyperbolic Discounting," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(2), pages 443-478.
    3. Koch, Alexander K. & Nafziger, Julia, 2016. "Goals and bracketing under mental accounting," Journal of Economic Theory, Elsevier, vol. 162(C), pages 305-351.
    4. Koch, Alexander K. & Nafziger, Julia & Suvorov, Anton & van de Ven, Jeroen, 2014. "Self-rewards and personal motivation," European Economic Review, Elsevier, vol. 68(C), pages 151-167.
    5. Young, Benjamin, 2024. "Expectations or rational expectations? A theory of systematic goal deviation," Journal of Economic Behavior & Organization, Elsevier, vol. 219(C), pages 25-37.
    6. Hsiaw, Alice, 2013. "Goal-setting and self-control," Journal of Economic Theory, Elsevier, vol. 148(2), pages 601-626.
    7. Incekara-Hafalir, Elif & Linardi, Sera, 2017. "Awareness of low self-control: Theory and evidence from a homeless shelter," Journal of Economic Psychology, Elsevier, vol. 61(C), pages 39-54.
    8. Oliver Himmler & Robert Jäckle & Philipp Weinschenk, 2019. "Soft Commitments, Reminders, and Academic Performance," American Economic Journal: Applied Economics, American Economic Association, vol. 11(2), pages 114-142, April.
    9. S. Nageeb Ali, 2011. "Learning Self-Control," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 126(2), pages 857-893.
    10. Edvardsson Björnberg, Karin, 2013. "Rational climate mitigation goals," Energy Policy, Elsevier, vol. 56(C), pages 285-292.
    11. Rao, Raghunath Singh & Irwin, Julie & Liu, Zhuping, 2020. "Flying with a net, and without: Preventative devices and self-control," International Journal of Research in Marketing, Elsevier, vol. 37(3), pages 521-543.
    12. Koch, Alexander K. & Nafziger, Julia, 2011. "Goals and Psychological Accounting," IZA Discussion Papers 5802, Institute of Labor Economics (IZA).

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    More about this item

    JEL classification:

    • A12 - General Economics and Teaching - - General Economics - - - Relation of Economics to Other Disciplines
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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