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Temptation and self-control: some evidence and applications

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  • Kevin X. D. Huang
  • Zheng Liu
  • Qi Zhu

Abstract

This paper studies the empirical relevance of temptation and self-control using household-level data from the Consumer Expenditure Survey. We estimate an infinite-horizon consumption-savings model that allows, but does not require, temptation and self-control in preferences. To help identify the presence of temptation, we exploit an implication of the theory that a tempted individual has a preference for commitment. In the presence of temptation, the cross-sectional distribution of the wealth-consumption ratio, in addition to that of consumption growth, becomes a determinant of the asset-pricing kernel, and the importance of this additional pricing factor depends on the strength of temptation. The estimates that we obtain provide statistical evidence supporting the presence of temptation. Based on our estimates, we explore some quantitative implications of this class of preferences on equity premium and on the welfare cost of business cycles.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Minneapolis in its series Staff Report with number 367.

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Date of creation: 2006
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Handle: RePEc:fip:fedmsr:367

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Keywords: Asset pricing ; Welfare;

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Cited by:
  1. Tsvetan Tsvetanov & Kathleen Segerson, 2011. "Re-Evaluating the Role of Energy Efficiency Standards: A Time-Consistent Behavioral Economics Approach," Working Papers 07, University of Connecticut, Department of Agricultural and Resource Economics, Charles J. Zwick Center for Food and Resource Policy.
  2. Kumru, Cagri S. & Tran, Chung, 2012. "Temptation and social security in a dynastic framework," European Economic Review, Elsevier, vol. 56(7), pages 1422-1445.
  3. Cagri S. Kumru & Athanasios C. Thanopoulos, 2010. "Social Security Reform with Self-Control Preferences," Discussion Papers 2010-11, School of Economics, The University of New South Wales.
  4. Pier-Andre Bouchard St-Amant & Jean-Denis Garon, 2013. "Optimal Redistributive Pensions with Temptation and Costly Self-Control," Working Papers 1311, Queen's University, Department of Economics.
  5. Cagri S. Kumru & Athanasios C. Thanopoulos, 2011. "Self-control Preferences and Taxation: A Quantitative Analysis in a Life Cycle Model," ANU Working Papers in Economics and Econometrics 2011-546, Australian National University, College of Business and Economics, School of Economics.
  6. Tsvetan Tsvetanov & Kathleen Segerson, 2011. "Re-Evaluating the Role of Energy Efficiency Standards: A Time-Consistent Behavioral Economics Approach," Working papers 2011-24, University of Connecticut, Department of Economics.
  7. Pier-André Bouchard St-Amant & Jean-Denis Garon, 2014. "Optimal Redistributive Pensions and the Cost of Self-Control," CESifo Working Paper Series 4937, CESifo Group Munich.

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