Self-Signaling and the Demand for Commitment Savings Devices

Download or read book Self-Signaling and the Demand for Commitment Savings Devices written by Nikhil Gupta and published by . This book was released on 2017 with total page 55 pages. Available in PDF, EPUB and Kindle. Book excerpt: Take-up of commitment savings devices remains low, even amongst individuals exhibiting both time-inconsistent preferences and a desire for higher savings. I adapt the self-signaling framework of Benabou and Tirole (2004) to propose an explanation for this phenomenon. High and low willpower agents with self-reputation concerns trade-off a desire to forestall future temptation spending with a desire to maintain the belief that they have high willpower. In equilibrium, low willpower agents attempt to mimic high willpower agents: when high willpower agents refrain from using the commitment savings device, low willpower agents (who ex-ante prefer to use the device) refrain as well. I show that a social planner may optimally choose to provide commitment savings devices that bundle different types of agents in order to overcome the adverse self-signaling effects that reduce demand for these devices. I further show that a monopolist can profitably provide bundling devices, but only does so when agents have high values of reputation, unlike the social planner. Finally, I show that competitive markets cannot provide bundling devices unless the costs of providing flexible commitment accounts is sufficiently low, reinforcing the importance of understanding how to make commitment accounts with soft commitment features more efficacious.