NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Commitment Vs. Flexibility

Manuel Amador, Ivan Werning, George-Marios Angeletos

NBER Working Paper No. 10151
Issued in December 2003
NBER Program(s):   EFG

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.

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Document Object Identifier (DOI): 10.3386/w10151

Published: Manuel Amador & Iván Werning & George-Marios Angeletos, 2006. "Commitment vs. Flexibility," Econometrica, Econometric Society, vol. 74(2), pages 365-396, 03.

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