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Temptation and Self-Control: Some Evidence and Applications

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  • Kevin X.D. Huang

    ()
    (Department of Economics, Vanderbilt University)

  • Zheng Liu

    ()
    (Department of Economics, Emory University)

  • John Q. Zhu

    ()
    (Department of Economics, Emory University)

Abstract

This paper studies the empirical relevance of temptation and self-control using household-level data from the Consumer Expenditure Survey. We construct an infinite-horizon consumption-savings model that allows, but does not require, temptation and self-control in preferences. To distinguish temptation preferences from others, we exploit individual-level heterogeneities in our data set, and we rely on an implication of the theory that a more tempted individual should be more likely to hold commitment assets. 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 empirical 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 for capital accumulation in a neoclassical growth model and the welfare cost of the business cycle.

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Paper provided by Vanderbilt University Department of Economics in its series Vanderbilt University Department of Economics Working Papers with number 0711.

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Date of creation: Aug 2007
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Handle: RePEc:van:wpaper:0711

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Web page: http://www.vanderbilt.edu/econ/wparchive/index.html

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Keywords: Temptation; self-control; limited participation; growth; welfare ;

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Cited by:
  1. Cagri Seda Kumru & Athanasios C. Thanopoulos, 2011. "Self-control Preferences and Taxation: A Quantitative Analysis in a Life-cycle Model," Working Papers, ARC Centre of Excellence in Population Ageing Research (CEPAR), Australian School of Business, University of New South Wales 201122, ARC Centre of Excellence in Population Ageing Research (CEPAR), Australian School of Business, University of New South Wales.
  2. Pier-Andre Bouchard St-Amant & Jean-Denis Garon, 2013. "Optimal Redistributive Pensions with Temptation and Costly Self-Control," Working Papers, Queen's University, Department of Economics 1311, Queen's University, Department of Economics.
  3. Cagri S. Kumru & Athanasios C. Thanopoulos, 2010. "Social Security Reform with Self-Control Preferences," Discussion Papers, School of Economics, The University of New South Wales 2010-11, School of Economics, The University of New South Wales.
  4. 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.
  5. Cagri Seda Kumru & Chung Tran, 2009. "Temptation and Social Security in a Dynastic Framework," Discussion Papers, School of Economics, The University of New South Wales 2009-09, School of Economics, The University of New South Wales.
  6. Tsvetan Tsvetanov & Kathleen Segerson, 2011. "Re-Evaluating the Role of Energy Efficiency Standards: A Time-Consistent Behavioral Economics Approach," Working papers, University of Connecticut, Department of Economics 2011-24, University of Connecticut, Department of Economics.
  7. Tsvetan Tsvetanov & Kathleen Segerson, 2011. "Re-Evaluating the Role of Energy Efficiency Standards: A Time-Consistent Behavioral Economics Approach," Working Papers, University of Connecticut, Department of Agricultural and Resource Economics, Charles J. Zwick Center for Food and Resource Policy 07, University of Connecticut, Department of Agricultural and Resource Economics, Charles J. Zwick Center for Food and Resource Policy.

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