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On the Design of an Optimal Transfer Schedule with Time Inconsistent Preferences

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Abstract

This paper incorporates the phenomenon of time inconsistency into the problem of designing an optimal transfer schedule. It is shown that if program bene ciaries are time inconsistent and receive all of the resources in just one payment, then the equilibrium allocation is always ine cient. In the spirit of the second welfare theorem, we show that any e cient allocation can be ob- tained in equilibrium when the policymaker has full information. This assump- tion is relaxed by introducing uncertainty and asymmetric information into the model. The optimal solution reflects the dilemma that a policymaker has to face when playing the roles of commitment enforcer and insurance provider simultaneously.

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WP 2006-08 January 2006

JEL Classification Codes: D910; H390; H550

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2006-01-01

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Charles H. Dyson School of Applied Economics and Management, Cornell University

Keywords

Time Inconsistency; Transfer Schedule; Hyperbolic Discounting; Self-Control Problems; Consumption; Uncertainty

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