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Dynamically Inconsistent Preferences and Money Demand

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Abstract

This paper focuses on two main issues. First, we find that, on average, households’ discount rates decline. This implies dynamically inconsistent preferences. Second, we calculate an indicator of the degree of dynamic inconsistency that may help us to understand how households overcome their self-control problems. We use a micro dataset containing households’ reports on the compensation for receiving hypothetical rewards with delays. We find that individuals with more severely dynamicly inconsistent preferences on average hold a statistically significantly lower share of their total wealth in checking accounts. A possible interpretation is that subjects use precommitment strategies to limit their temptation to consume immediately.

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File URL: ftp://www.ceistorvergata.it/repec/rpaper/RP129.pdf
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Bibliographic Info

Paper provided by Tor Vergata University, CEIS in its series CEIS Research Paper with number 129.

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Length: 18 pages
Date of creation: 09 Sep 2008
Date of revision: 09 Sep 2008
Handle: RePEc:rtv:ceisrp:129

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Postal: CEIS - Centre for Economic and International Studies - Faculty of Economics - University of Rome "Tor Vergata" - Via Columbia, 2 00133 Roma
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Postal: CEIS - Centre for Economic and International Studies - Faculty of Economics - University of Rome "Tor Vergata" - Via Columbia, 2 00133 Roma
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Web: http://www.ceistorvergata.it

Related research

Keywords: Behavioral Economics; Intertemporal choice; Hyperbolic Discounting; Dynamic Inconsistency; Precommitment;

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References

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  1. Donkers, A.C.D. & Soest, A.H.O. van, 1997. "Subjective measures of household preferences and financial decisions," Discussion Paper, Tilburg University, Center for Economic Research 1997-70, Tilburg University, Center for Economic Research.
  2. Matthew Rabin & Ted O'Donoghue, 1999. "Doing It Now or Later," American Economic Review, American Economic Association, American Economic Association, vol. 89(1), pages 103-124, March.
  3. David Laibson, 2001. "A Cue-Theory Of Consumption," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 116(1), pages 81-119, February.
  4. George-Marios Angeletos, 2001. "The Hyberbolic Consumption Model: Calibration, Simulation, and Empirical Evaluation," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 15(3), pages 47-68, Summer.
  5. Laibson, David, 1997. "Golden Eggs and Hyperbolic Discounting," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 112(2), pages 443-77, May.
  6. Giamboni, Luigi & Millemaci, Emanuele & Waldmann, Robert, 2007. "Evaluating how predictable errors in expected income affect consumption," MPRA Paper 12939, University Library of Munich, Germany.
  7. 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.
  8. Ted O' Donoghue and Matthew Rabin., 2000. "Choice and Procrastination," Economics Working Papers, University of California at Berkeley E00-281, University of California at Berkeley.
  9. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 86(6), pages 971-87, December.
  10. Kahneman, Daniel & Thaler, Richard H, 1991. "Economic Analysis and the Psychology of Utility: Applications to Compensation Policy," American Economic Review, American Economic Association, American Economic Association, vol. 81(2), pages 341-46, May.
  11. 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.
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  1. I am storing pdf's at google sites so you can see my research
    by Robert in Robert's Stochastic Thoughts on 2009-03-16 11:09:00

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