Amador, Werning and Angeletos - Commitment vs Flexibility Flashcards
(12 cards)
What is the central question addressed in Amador, Werning, and Angeletos’ work?
The optimal trade-off between commitment and flexibility in savings policies when individuals have present-biased preferences and face taste shocks.
What are the two competing forces that create the trade-off in their model?
Present bias (creating a need for commitment) versus taste shocks/uncertainty about future preferences (creating a need for flexibility)
What type of preferences do agents have in the Amador-Werning-Angeletos model?
Quasi-hyperbolic (β-δ) preferences with present bias (β < 1) plus random taste shocks to future utility.
What is a key assumption about sophistication in their baseline model?
Agents are sophisticated about their present bias, meaning they correctly anticipate their future self-control problems.
What is the timing structure of their basic model?
A three-period model: in period 0, a policy is chosen; in period 1, consumption-savings decisions are made; in period 2, remaining wealth is consumed.
What role do taste shocks play in their model?
Taste shocks represent legitimate variation in preferences over time (not present bias) and create a need for flexibility in consumption choices.
Why is a minimum savings rule optimal rather than a fully specified savings amount?
It provides commitment against under-saving due to present bias while maintaining flexibility to respond to legitimate taste shocks.
What happens to the minimum savings requirement as the degree of present bias (1-β) increases?
The minimum savings requirement increases as present bias becomes more severe.
What mathematical approach do Amador-Werning-Angeletos use to solve their model?
A mechanism design approach with incentive compatibility constraints that account for both present bias and private information about taste shocks.
How does the Amador-Werning-Angeletos approach differ from Laibson’s “golden eggs” model?
Their model incorporates taste shocks and focuses on mechanism design for optimal commitment devices, while Laibson focuses on equilibrium behavior with illiquid assets.
What mathematical condition determines the level of the minimum savings threshold?
The minimum savings level is set where the marginal benefit of additional commitment equals the marginal cost of reduced flexibility.
