Econometrica: Jul, 2015, Volume 83, Issue 4
Commitment, Flexibility, and Optimal Screening of Time Inconsistency
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.
Supplement to “Commitment, Flexibility, and Optimal Screening of Time Inconsistency”
Appendix B contains all omitted proofs of the main paper. Appendix C contains the calculations for the illustrative example. Appendix D discusses the case of outside options with type-dependent values. Appendix E discusses the case of finitely many states.