Rising indebtedness and temptation: A welfare analysis
Is the observed large increase in consumer indebtedness since 1970 beneficial for U.S. consumers? This paper quantitatively investigates the macroeconomic and welfare implications of relaxing borrowing constraints using a model with preferences featuring temptation and self-control. The model can capture two contrasting views: the positive view, which links increased indebtedness to financial innovation and thus better consumption smoothing, and the negative view, which is associated with consumers' over-borrowing. The author finds that the latter is sizable: the calibrated model implies a social welfare loss equivalent to a 0.4 percent decrease in per-period consumption from the relaxed borrowing constraint consistent with the observed increase in indebtedness. The welfare implication is strikingly different from the standard model without temptation, which implies a welfare gain of 0.7 percent, even though the two models are observationally similar. Naturally, the optimal level of the borrowing limit is significantly tighter according to the temptation model, as a tighter borrowing limit helps consumers by preventing over-borrowing.
(This abstract was borrowed from another version of this item.)
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 3 (2012)
Issue (Month): 2 (07)
|Contact details of provider:|| Phone: 1 212 998 3820|
Fax: 1 212 995 4487
Web page: http://www.qeconomics.org
More information through EDIRC
|Order Information:|| Web: https://www.econometricsociety.org/membership Email: |
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Huggett, Mark, 1996. "Wealth distribution in life-cycle economies," Journal of Monetary Economics, Elsevier, vol. 38(3), pages 469-494, December.
- Makoto Nakajima, 2009. "Equilibrium Default and Temptation," 2009 Meeting Papers 863, Society for Economic Dynamics.
- Jeremy Tobacman & David Laibson, 2007.
"Estimating Discount Functions with Consumption Choices over the Lifecycle,"
Economics Series Working Papers
341, University of Oxford, Department of Economics.
- 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.
- David Laibson & Andrea Repetto & Jeremy Tobacman, 2005. "Estimating Discount Functions with Consumption Choices over the Lifecycle," Levine's Bibliography 784828000000000643, UCLA Department of Economics.
- David Laibson & Andrea Repetto & Jeremy Tobacman, 2007. "Estimating Discount Functions with Consumption Choices over the Lifecycle," NBER Working Papers 13314, National Bureau of Economic Research, Inc.
- Benjamin A. Malin, 2005.
"Hyperbolic Discounting and Uniform Savings Floor,"
04-034, Stanford Institute for Economic Policy Research.
- Juan Carlos Conesa & Sagiri Kitao & Dirk Krueger, 2007.
"Taxing Capital? Not a Bad Idea After All!,"
NBER Working Papers
12880, National Bureau of Economic Research, Inc.
- Juan C. Conesa & Dirk Krueger, 2004. "Taxing Capital: Not a Bad Idea After All," 2004 Meeting Papers 403, Society for Economic Dynamics.
- Conesa, Juan Carlos & Kitao, Sagiri & Krueger, Dirk, 2006. "Taxing Capital? Not a Bad Idea After All!," CEPR Discussion Papers 5929, C.E.P.R. Discussion Papers.
- Conesa, Juan Carlos & Kitao, Sagiri & Krueger, Dirk, 2006. "Taxing capital? Not a bad idea after all!," CFS Working Paper Series 2006/21, Center for Financial Studies (CFS).
- Josep Pijoan-Mas, 2004.
"Precautionary Savings or Working Longer Hours?,"
2004 Meeting Papers
350, Society for Economic Dynamics.
- David Laibson & Andrea Repetto & Jeremy Tobacman, 2000.
"A Debt Puzzle,"
NBER Working Papers
7879, National Bureau of Economic Research, Inc.
- David I. Laibson, 1996. "Hyperbolic Discount Functions, Undersaving, and Savings Policy," NBER Working Papers 5635, National Bureau of Economic Research, Inc.
- Per Krusell & Burhanettin Kuruscu & Anthony A. Smith, Jr., 2000.
"Temptation and Taxation,"
GSIA Working Papers
2001-12, Carnegie Mellon University, Tepper School of Business.
- Francesc Obiols-Homs, 2011.
"On borrowing limits and welfare,"
Review of Economic Dynamics,
Elsevier for the Society for Economic Dynamics, vol. 14(2), pages 279-294, April.
- Igor Livshits & James MacGee & Michèle Tertilt, 2007.
"Accounting for the Rise in Consumer Bankruptcies,"
NBER Working Papers
13363, National Bureau of Economic Research, Inc.
When requesting a correction, please mention this item's handle: RePEc:ecm:quante:v:3:y:2012:i:2:p:257-288. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing)or (Christopher F. Baum)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.