Economics Weekly Seminar: Karna Basu
February 20 @ 1:30 pm - 2:40 pm
Title: Commitment as extortion?
Speaker: Karna Basu, Hunter College (CUNY)
Wednesday, February 20, 1:30 – 2:40pm
AC 02 LR 105
Abstract: 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.