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Durable goods as commitment devices under quasi-hyperbolic discounting

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  • Kang, Jingoo
  • Kang, Minwook

Abstract

Why do some people prefer owning durable goods instead of renting? We show that owning durable goods provides a commitment incentive for a consumer with time inconsistent preferences and helps maximize her utility. Previous research on time inconsistent preferences has focused on the role of financial assets as a commitment device and showed that illiquid financial assets cannot play such a commitment role. In this paper, we incorporate durable goods into the quasi-hyperbolic discounting model and show that the price of durable goods reflects a positive commitment premium. Our finding of the commitment incentive in durable goods provides a possible explanation of why owning rather than renting durable goods is a better idea for consumers.

Suggested Citation

  • Kang, Jingoo & Kang, Minwook, 2022. "Durable goods as commitment devices under quasi-hyperbolic discounting," Journal of Mathematical Economics, Elsevier, vol. 99(C).
    • Handle: RePEc:eee:mateco:v:99:y:2022:i:c:s0304406821001245
    DOI: 10.1016/j.jmateco.2021.102561
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