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Present-Bias in Different Income Groups

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  • Burak Can

    ()

  • Orhan Erdem

    ()

Abstract

The excessive use of credit cards and increasing consumer borrowing has been a major problem. Laibson (1997) suggests the present-bias problem as one of the driving forces of excessive bor- rowing. Shefrin and Thaler (1988) suggest that self-control underlies national borrowing/savings rate. We conduct a survey to check for present-bias as well as self-control problems among indi- viduals in Turkey. Our findings show that different income groups have similar discount factors, i.e., impatience levels, but very different degrees of dynamic inconsistencies, i.e. present-bias levels. In particular, 29.4% of low-income individuals exhibit present-bias whereas this is down to 6.4% for high-income individuals. Using the parameters we achieve through the surveys, policymakers can design appropriate commitment devices for time-inconsistent individuals to ensure a sustainable level of aggregate saving and financial investment.

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Bibliographic Info

Paper provided by Research and Business Development Department, Borsa Istanbul in its series Working Paper with number 03.

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Date of creation: Feb 2013
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Handle: RePEc:bor:wpaper:1303

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Related research

Keywords: Self-control; present-bias; time preferences; quasi-hyperbolic discounting;

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References

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  1. Laibson, David, 1997. "Golden Eggs and Hyperbolic Discounting," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 443-77, May.
  2. David Laibson & Andrea Repetto & Jeremy Tobacman, 2007. "Estimating Discount Functions with Consumption Choices over the Lifecycle," Documentos de Trabajo 236, Centro de Economía Aplicada, Universidad de Chile.
  3. Glenn Harrison & Morten Lau & Elisabet Rutstrom & Melonie Williams, 2002. "Estimating individual discount rates in denmark: A field experiment," Artefactual Field Experiments 00062, The Field Experiments Website.
  4. O'Donoghue, Ted & Rabin, Matthew, 1997. "Doing It Now or Later," Department of Economics, Working Paper Series qt7t44m5b0, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  5. Shane Frederick & George Loewenstein & Ted O'Donoghue, 2002. "Time Discounting and Time Preference: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 40(2), pages 351-401, June.
  6. Meier, Stephan & Sprenger, Charles, 2009. "Present-Biased Preferences and Credit Card Borrowing," IZA Discussion Papers 4198, Institute for the Study of Labor (IZA).
  7. Shefrin, Hersh M & Thaler, Richard H, 1988. "The Behavioral Life-Cycle Hypothesis," Economic Inquiry, Western Economic Association International, vol. 26(4), pages 609-43, October.
  8. Botond Kőszegi & Paul Heidhues, 2008. "Competition and Price Variation When Consumers Are Loss Averse," American Economic Review, American Economic Association, vol. 98(4), pages 1245-68, September.
  9. Thaler, Richard, 1981. "Some empirical evidence on dynamic inconsistency," Economics Letters, Elsevier, vol. 8(3), pages 201-207.
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