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Income groups and long term investment

Author

Listed:
  • Burak Can

    () (Maastricht University)

  • Orhan Erdem

    () (Borsa Istanbul)

Abstract

Laibson (1997) suggests the present bias problem as one of the driving forces of excessive borrowing. Shefrin and Thaler (1988) suggest that self-control underlies national borrowing/savings rate. We conduct a survey with 65 people between the ages of 21 and 56 to check for present bias as well as self-control problems among individuals in Turkey using a quasi-hyperbolic discounting model. 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, 32.2% of low-income individuals exhibit present bias whereas this is down to 5.9% for high-income individuals. This result does not depend on a particular assumption of a utility function. Using the parameters we elicit through the surveys, policymakers can design appropriate commitment devices for time-inconsistent individuals to ensure a sustainable level of aggregate saving and financial investment.

Suggested Citation

  • Burak Can & Orhan Erdem, 2013. "Income groups and long term investment," Economics Bulletin, AccessEcon, vol. 33(4), pages 3014-3022.
  • Handle: RePEc:ebl:ecbull:eb-13-00636
    as

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    File URL: http://www.accessecon.com/Pubs/EB/2013/Volume33/EB-13-V33-I4-P281.pdf
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    References listed on IDEAS

    as
    1. Matthew Rabin & Ted O'Donoghue, 1999. "Doing It Now or Later," American Economic Review, American Economic Association, pages 103-124.
    2. Stephan Meier & Charles Sprenger, 2010. "Present-Biased Preferences and Credit Card Borrowing," American Economic Journal: Applied Economics, American Economic Association, vol. 2(1), pages 193-210, January.
    3. Kirsten Rohde, 2010. "The hyperbolic factor: A measure of time inconsistency," Journal of Risk and Uncertainty, Springer, vol. 41(2), pages 125-140, October.
    4. George Loewenstein & Drazen Prelec, 1992. "Anomalies in Intertemporal Choice: Evidence and an Interpretation," The Quarterly Journal of Economics, Oxford University Press, vol. 107(2), pages 573-597.
    5. Arthur E. Attema & Han Bleichrodt & Kirsten I. M. Rohde & Peter P. Wakker, 2010. "Time-Tradeoff Sequences for Analyzing Discounting and Time Inconsistency," Management Science, INFORMS, pages 2015-2030.
    6. Shefrin, Hersh M & Thaler, Richard H, 1988. "The Behavioral Life-Cycle Hypothesis," Economic Inquiry, Western Economic Association International, vol. 26(4), pages 609-643, October.
    7. E. S. Phelps & R. A. Pollak, 1968. "On Second-Best National Saving and Game-Equilibrium Growth," Review of Economic Studies, Oxford University Press, vol. 35(2), pages 185-199.
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    More about this item

    Keywords

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

    JEL classification:

    • D9 - Microeconomics - - Micro-Based Behavioral Economics
    • C9 - Mathematical and Quantitative Methods - - Design of Experiments

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