Economics of Commitment: Why Giving Away Some Freedom Makes Sense

Authors

Vladik Kreinovich, The University of Texas at El PasoFollow
Olga Kosheleva, The University of Texas at El PasoFollow
Mahdokhat Afravi, The University of Texas at El PasoFollow
Genesis Bejarano, The University of Texas at El PasoFollow
Marisol Chacon, The University of Texas at El PasoFollow

Publication Date

4-2018

Comments

Technical Report: UTEP-CS-18-33

Published in Mathematical Structures and Modeling, 2018, Vol. 46, pp. 73-87.

Abstract

In general, the more freedom we have, the better choices we can make, and thus, the better possible economic outcomes. However, in practice, people often artificially restrict their future options by making a commitment. At first glance, commitments make no economic sense, and so their ubiquity seems puzzling. Our more detailed analysis shows that commitment often makes perfect economic sense: namely, it is related to the way we take future gains and losses into account. With the traditionally assumed exponential discounting, commitment indeed makes no economic sense, but with the practically observed hyperbolic discounting, commitment is indeed often economically beneficial.