On the Commitment Needs of Partially Naive Agents

39 Pages Posted: 27 Apr 2020

See all articles by Pan Liu

Pan Liu

affiliation not provided to SSRN

Torben M. Andersen

University of Aarhus - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Joydeep Bhattacharya

Iowa State University - Department of Economics

Abstract

Time-inconsistent, present-biased agents may hold commitment assets hoping to keep their current and future present bias in check. Paternalistic governments, in an effort to help such people, routinely offer commitment machinery such as restrictions (or bans) on early withdrawals from defined-contribution, retirement schemes. The larger literature on low uptake of commitment assets recognizes a trade-off: while use of commitment technologies thwarts deviation from pre-selected paths, they, nevertheless, limit flexibility of future selves to respond to unanticipated, consumption shocks.This paper rules out consumption or income shocks by design and yet uncovers a similar trade-off in a world where agents are uncertain but hold beliefs, possibly incorrect, about the present-biasedness of future selves. It shows how fully sophisticated agents — those with correct beliefs about the present-bias of future selves — are happier when the government offers tighter commitment; this is not necessarily so, for the partially naive. Indeed, the latter may be happier than their fully sophisticated counterparts if the government's commitment machinery is slack.

Keywords: time-inconsistency, present bias, savings, commitment

JEL Classification: D1, D14

Suggested Citation

Liu, Pan and Andersen, Torben M. and Bhattacharya, Joydeep, On the Commitment Needs of Partially Naive Agents. IZA Discussion Paper No. 13169, Available at SSRN: https://ssrn.com/abstract=3584932

Pan Liu (Contact Author)

affiliation not provided to SSRN

Torben M. Andersen

University of Aarhus - Department of Economics ( email )

University Park
Building 322
DK-8000 Aarhus C
Denmark
+45 8 942 1609 (Phone)
+45 8 613 6334 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Joydeep Bhattacharya

Iowa State University - Department of Economics ( email )

260 Heady Hall
Ames, IA 50011
United States
515-294-5886 (Phone)
515-294-0221 (Fax)

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