Comment on “Commitment vs. Flexibility”
Econometrica · 2013 · Volume 81 · Issue 5
Abstract
This comment corrects two results in the 2006Econometricapaper by Amador, Werning, and Angeletos (AWA), that features a model in which individuals face a trade-off between flexibility and commitment. First, in contrast to Proposition 1 in AWA, we show that money-burning can be part of the ex ante optimal contract when there are two states. Second, in contrast to Proposition 2 in AWA, we show that money-burning can be imposed at the top (in the highest liquidity shock state), even when there is a continuum of states. We provide corrected versions of the above results.
Keywords
Commitment, flexibility, self-control, money-burning
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