Contracting over commitment vs. flexibility under asymmetric information

Arbeitspapier

We study a dynamic model of monopolistic provision of commitment devices to sophisticated, Strotzian decision makers. We allow for unobservable heterogeneity at the contracting stage in the agents' preferences for commitment vs. flexibility. The first-best contracts under complete information allow to successfully commit to the optimal level of flexibility. Importantly, this outcome is robust to small amounts of unobservable heterogeneity. When individuals differ substantially in their self control, under asymmetric information highly time-inconsistent agents exert a positive externality on low time-inconsistent fellows. Its magnitude depends on the degree of contractual flexibility and the likelihood of facing temptation. We derive the optimal screening mechanism and characterize its distortions. We analyze the inefficiency of the monopolist's offers in terms of the induced balance between commitment and flexibility.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Discussion Paper ; No. 1520

Classification and Topics

• Classification: Wirtschaft ; Market Structure, Pricing, and Design: Monopoly ; Externalities ; Asymmetric and Private Information; Mechanism Design ; Economics of Contract: Theory ; Micro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making‡ ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages ; Pension Funds; Non-bank Financial Institutions; Financial Instruments; Institutional Investors
• Subject: time inconsistency ; self-control ; commitment ; flexibility ; contracts ; screening ; information externalities

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Galperti, Simone
• Event: Veröffentlichung
• (who): Northwestern University, Kellogg School of Management, Center for Mathematical Studies in Economics and Management Science
• (where): Evanston, IL
• (when): 2011

Further information

• Handle: http://hdl.handle.net/10419/59663
• Last update: 10.03.2025, 11:44 AM CET