Centre for Development Economics
Department of Economics, Delhi School of Economics


Commitment as Extortion?


Karna Basu
Hunter College, City University of New York


14th February 2019 (Thursday) at 3:00 PM

Venue : Seminar Room (First Floor)
Department of Economics, Delhi School of Economics

All are cordially invited
Hyperbolic discounters value commitment contracts. The amount a consumer is willing to pay for commitment depends not just on what she would consume in autarky; it also depends on the commitment contract she would sign tomorrow, which itself might depend on the contract she would sign the next day, and so on. I formulate the consumer’s outside option as a compound of potential future contracts. Using quite general notions of welfare, I derive conditions under which monopoly commitment contracts make the consumer better or worse off than under autarky. If autarky consumption is sufficiently decreasing over time, commitment is strictly welfare-improving, even when the monopolist can perfectly price discriminate. If autarky consumption is non-decreasing, commitment is strictly welfare-reducing. In this case, the consumer prefers not to have access to commitment, but will adopt commitment as a response to the threat of her future selves adopting it.

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