Commitment and welfare

•The number of times a choice is made in dynamic settings has welfare implications.•Commitment yields Pareto gains if the number of choices exceeds a low threshold.•Typical behavioral welfare analysis may align with a multiself Pareto criterion. The standard approach to welfare analysis under dynami...

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Bibliographic Details
Published in:Journal of economic behavior & organization 2019-03, Vol.159, p.210-234
Main Authors: Caliendo, Frank N., Findley, T. Scott
Format: Article
Language:English
Subjects:
Behavioral welfare analysis
Commitment
Dynamic inconsistency
Hyperbolic discounting
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Summary:•The number of times a choice is made in dynamic settings has welfare implications.•Commitment yields Pareto gains if the number of choices exceeds a low threshold.•Typical behavioral welfare analysis may align with a multiself Pareto criterion. The standard approach to welfare analysis under dynamically inconsistent preferences is to assume that the welfare of an individual is maximized if he can commit to his initial goal. We study a potential rationale for such welfare analysis. In some prominent, well-studied examples with intertemporal tradeoffs (like the choice between investing in a project now or later, doing an unpleasant task now or procrastinating it until later, and eating a cake), we find that the commitment allocation can multiself Pareto dominate the non-cooperative equilibrium allocation if the number of time-dated selves exceeds a low threshold. While a common concern with behavioral welfare analysis is that the later selves of an individual are unfairly hurt as a result of committing the individual to his initial goal, our findings indicate that this concern may be more relevant for settings where the number of sequential choices is very low.
ISSN:0167-2681
1879-1751
DOI:10.1016/j.jebo.2019.01.008