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Present-biased preferences and the effect of illiquid assets

Author

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  • Tang, Rong
  • Pu, Shi
  • Chen, Shou

Abstract

This paper incorporates liquidity constraints into a discrete three-stage model to investigate the consumption-savings decisions of present-biased agents. We derive the analytical solution for consumption choices of sophisticated and naive agents who hold illiquid assets that are untradable until the last period. Then, we investigate how the proportion of illiquid assets, liquidity premium and agents’ preferences affect the consumption of both agents. Our findings reveal that naive agents not always consume more than their sophisticated counterparts. Moreover, we theoretically find that illiquid assets may improve the welfare of agents and have a pre-commitment effect on both agents.

Suggested Citation

  • Tang, Rong & Pu, Shi & Chen, Shou, 2024. "Present-biased preferences and the effect of illiquid assets," Economics Letters, Elsevier, vol. 244(C).
    • Handle: RePEc:eee:ecolet:v:244:y:2024:i:c:s0165176524005056
    DOI: 10.1016/j.econlet.2024.112021
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    More about this item

    Keywords

    Present bias; Illiquid asset; Liquidity premium; Consumption-savings decisions; Pre-commitment effect;
    All these keywords.

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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