Intertemporal Choice and Legal Constraints
AbstractWe study the effect of legal constraints in an environment in which agents face demand shocks they would like to smooth but also have weakness of will: agents' long and short run preferences are misaligned. Some agents are sophisticated--they know they will make inconsistent intertemporal choices--while other agents are naive. The consequent public policy problem is complex. The state should facilitate consumer borrowing to help agents' smooth consumption and cushion the effect of shocks, but should also facilitate precommitment, to help agents control excessive present-biased preferences. We show that in many simple settings, naive and sophisticated agents make similar consumption/savings choices, which simplifies the policy problem. We also show that all agents borrow when they experience consumption shocks and that agents with relatively strong present-biased preferences who face relatively mild consumption shocks will borrow to finance excessive current consumption. Other agents save appropriately. Legal constraints that severely restrict agents' access to credit thus would be over-inclusive. Offering agents access to both a liquid and an illiquid savings vehicle appears to be welfare improving relative to either allowing agents complete freedom to borrow or strongly restricting their access to the credit market. Creating and regulating such vehicles are public goods that the market will not supply. Copyright 2011, Oxford University Press.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by Oxford University Press in its journal American Law and Economics Review.
Volume (Year): 14 (2011)
Issue (Month): 1 ()
Contact details of provider:
Postal: Oxford University Press, Great Clarendon Street, Oxford OX2 6DP, UK
Fax: 01865 267 985
Web page: http://www.aler.oupjournals.org/
You can help add them by filling out this form.
reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Oxford University Press) or (Christopher F. Baum).
If references are entirely missing, you can add them using this form.