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Hyperbolic discounting and uniform savings floors

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  • Malin, Benjamin A.

Abstract

Previous research suggests that, in partial equilibrium, individuals whose decision-making exhibits a present-bias - such as hyperbolic discounters who tend to over-consume - will be in favor of having a floor imposed on their savings. In this paper, I show it is quite difficult for the introduction of a savings floor to be Pareto improving in general equilibrium. Indeed, a necessary condition for the floor to be Pareto improving is that it is high enough to be binding for all individuals. Even in that case, because the equilibrium interest rate adjusts with the level of the savings floor, some individuals may prefer to commit to a future time path of consumption by facing a high interest rate (and no floor) rather than a high floor. An essential insight for understanding this result is to note that even those with little self-control (in an absolute sense) will choose to save a lot when the interest rate is high enough.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 92 (2008)
Issue (Month): 10-11 (October)
Pages: 1986-2002

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Handle: RePEc:eee:pubeco:v:92:y:2008:i:10-11:p:1986-2002

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Web page: http://www.elsevier.com/locate/inca/505578

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Keywords: Hyperbolic discounting General equilibrium Commitment;

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References

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  1. Benjamin A. Malin, 2007. "Hyperbolic discounting and uniform savings floors," Finance and Economics Discussion Series 2007-59, Board of Governors of the Federal Reserve System (U.S.).
  2. Agarwal, Sumit & Chomsisengphet, Souphala & Liu, Chunlin & Souleles, Nicholas S., 2005. "Do consumers choose the right credit contracts?," CFS Working Paper Series 2005/32, Center for Financial Studies (CFS).
  3. B. Douglas Bernheim, 1999. "Taxation and Saving," NBER Working Papers 7061, National Bureau of Economic Research, Inc.
  4. Sumit Agarwal & Souphala Chomsisengphet & Chunlin Liu & Nicholas S. Souleles, 2006. "Do consumers choose the right credit contracts?," Working Paper Series WP-06-11, Federal Reserve Bank of Chicago.
  5. Manuel Amador & Ivan Werning & George-Marios Angeletos, 2003. "Commitment Vs. Flexibility," NBER Working Papers 10151, National Bureau of Economic Research, Inc.
  6. John Ameriks & Andrew Caplin & John Leahy & Tom Tyler, 2004. "Measuring Self-Control," NBER Working Papers 10514, National Bureau of Economic Research, Inc.
  7. Steven F. Venti & David A. Wise, 2000. "Choice, Chance, and Wealth Dispersion at Retirement," NBER Working Papers 7521, National Bureau of Economic Research, Inc.
  8. David I. Laibson & Andrea Repetto & Jeremy Tobacman, 1998. "Self-Control and Saving for Retirement," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(1), pages 91-196.
  9. Laibson, David I., 1997. "Golden Eggs and Hyperbolic Discounting," Scholarly Articles 4481499, Harvard University Department of Economics.
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Cited by:
  1. Makoto Nakajima, 2012. "Rising indebtedness and temptation: A welfare analysis," Quantitative Economics, Econometric Society, vol. 3(2), pages 257-288, 07.
  2. Nakajima, Makoto, 2013. "A tale of two commitments: equilibrium default and temptation," Working Papers 14-1, Federal Reserve Bank of Philadelphia.
  3. Malin, Benjamin A., 2008. "Hyperbolic discounting and uniform savings floors," Journal of Public Economics, Elsevier, vol. 92(10-11), pages 1986-2002, October.

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