Private Paternalism, the Commitment Puzzle, and Model-Free Equilibrium

Abstract

Paternalism is a policy that advances an individual's interests by restricting his or her freedom. In a setting with present-biased agents, I characterize the scope of private paternalism—paternalism implemented by private institutions. Private paternalism arises from two channels: (i) agents who seek commitment because they hold sophisticated beliefs about their present bias, and (ii) agents (naive or sophisticated) who use model-free forecasts to choose organizations that have a history of generating high experienced utility flows for their members (O'Donoghue and Rabin 1999b). When naive consumers are common, private paternalism will be shrouded, explaining why commitment mechanisms are typically shrouded in the labor market (the commitment puzzle). Private paternalism has greater traction when production occurs in the formal sector instead of the informal (household) sector, where monitors are not always present, able, or willing to implement socially efficient forcing mechanisms.