Commitment vs. flexibility

Manuel Amador, Iván Werning, George Marios Angeletos

Research output: Contribution to journalArticlepeer-review

97 Scopus citations

Abstract

We study the optimal trade-off between commitment and flexibility in a consump- tion-savings model. Individuals expect to receive relevant information regarding tastes and thus they value the flexibility provided by larger choice sets. On the other hand, they also expect to suffer from temptation, with or without self-control, and thus they value the commitment afforded by smaller choice sets. The optimal commitment problem we study is to find the best subset of the individual's budget set. This problem leads to a principal-agent formulation. We find that imposing a minimum level of savings is always a feature of the solution. Necessary and sufficient conditions are derived for minimum-savings policies to completely characterize the solution. We also discuss other applications, such as the design of fiscal constitutions, the problem faced by a paternalist, and externalities.

Original languageEnglish (US)
Pages (from-to)365-396
Number of pages32
JournalEconometrica
Volume74
Issue number2
DOIs
StatePublished - Mar 2006

Keywords

  • Commitment
  • Flexibility
  • Hyperbolic discounting
  • Intertemporal preferences
  • Self-control
  • Social security
  • Temptation

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