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Banking regulation and costless commitment contracts for time-inconsistent agents

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  • Laureti, Carolina
  • Szafarz, Ariane
Abstract
Behavioral economics modeling assumes that the contractible commitments valued by sophisticated time-inconsistent agents come at a cost. This paper challenges this assumption by arguing that it disregards the benefits that providers derive from supplying commitment-based products. In our equilibrium model, the commitment embedded in an illiquid savings product is valuable to both market sides. Although sophisticated time-inconsistent agents value the commitment, they do not have to pay for contracting it. The necessary and sufficient conditions for having a costless commitment contract in the savings market combine strong liquidity constraints imposed on banks and the occurrence of harmful shocks. Our results have regulatory implications for social finance.

Suggested Citation

  • Laureti, Carolina & Szafarz, Ariane, 2023. "Banking regulation and costless commitment contracts for time-inconsistent agents," Economic Modelling, Elsevier, vol. 129(C).
    • Handle: RePEc:eee:ecmode:v:129:y:2023:i:c:s0264999323003486
    DOI: 10.1016/j.econmod.2023.106536
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    More about this item

    Keywords

    Behavioral economics; Banking; Savings account; Liquidity premium; Time inconsistency; Commitment contract;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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