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Hyperbolic discounting and uniform savings floors

  • Malin, Benjamin A.

Previous research suggests that, in partial equilibrium, individuals whose decision-making exhibits a present-bias - such as hyperbolic discounters who tend to over-consume - will be in favor of having a floor imposed on their savings. In this paper, I show it is quite difficult for the introduction of a savings floor to be Pareto improving in general equilibrium. Indeed, a necessary condition for the floor to be Pareto improving is that it is high enough to be binding for all individuals. Even in that case, because the equilibrium interest rate adjusts with the level of the savings floor, some individuals may prefer to commit to a future time path of consumption by facing a high interest rate (and no floor) rather than a high floor. An essential insight for understanding this result is to note that even those with little self-control (in an absolute sense) will choose to save a lot when the interest rate is high enough.

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Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 92 (2008)
Issue (Month): 10-11 (October)
Pages: 1986-2002

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Handle: RePEc:eee:pubeco:v:92:y:2008:i:10-11:p:1986-2002
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505578

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  1. David I. Laibson & Andrea Repetto & Jeremy Tobacman, 1998. "Self-Control and Saving for Retirement," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(1), pages 91-196.
  2. Steven F. Venti & David A. Wise, 2001. "Choice, Chance, and Wealth Dispersion at Retirement," NBER Chapters, in: Aging Issues in the United States and Japan, pages 25-64 National Bureau of Economic Research, Inc.
  3. Laibson, David I., 1997. "Golden Eggs and Hyperbolic Discounting," Scholarly Articles 4481499, Harvard University Department of Economics.
  4. Benjamin A. Malin, 2005. "Hyperbolic Discounting and Uniform Savings Floor," Discussion Papers 04-034, Stanford Institute for Economic Policy Research.
  5. John Ameriks & Andrew Caplin & John Leahy & Tom Tyler, 2004. "Measuring Self-Control," NBER Working Papers 10514, National Bureau of Economic Research, Inc.
  6. Manuel Amador & George-Marios Angeletos & Ivan Werning, 2004. "Commitment vs. Flexibility," 2004 Meeting Papers 87, Society for Economic Dynamics.
  7. Bernheim, B. Douglas, 2002. "Taxation and saving," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 18, pages 1173-1249 Elsevier.
  8. Sumit Agarwal & Souphala Chomsisengphet & Chunlin Liu & Nicholas S. Souleles, 2006. "Do consumers choose the right credit contracts?," Working Paper Series WP-06-11, Federal Reserve Bank of Chicago.
  9. Agarwal, Sumit & Chomsisengphet, Souphala & Liu, Chunlin & Souleles, Nicholas S., 2005. "Do consumers choose the right credit contracts?," CFS Working Paper Series 2005/32, Center for Financial Studies (CFS).
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