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Life-Cycle Models, Economic Puzzles and Temptation Preferences

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  • Alessandro Bucciol

    (University of Padua)

Abstract

This paper focuses on the difficulty of standard life-cycle models to predict the behavior observed in the reality, most noticeably the excess sensitivity of consumption to income, the under-provision for old-age consumption, the limited participation in the financial market, and the lack of asset decumulation after retirement. It shows that allowing for preference reversals, as it is the case in the “quasi-hyperbolic discounting” and “temptation” models, may contribute to explain jointly these economic puzzles. A life-cycle model based on temptation preferences, in particular, is attractive as it preserves time consistency and can be solved with standard dynamic programming techniques.

Suggested Citation

  • Alessandro Bucciol, 2007. "Life-Cycle Models, Economic Puzzles and Temptation Preferences," Giornale degli Economisti, GDE (Giornale degli Economisti e Annali di Economia), Bocconi University, vol. 66(1), pages 115-144, March.
  • Handle: RePEc:gde:journl:gde_v66_n1_p115-144
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    1. Carlos Bethencourt & Lars Kunze, 2017. "Temptation and the efficient taxation of education and labor," Metroeconomica, Wiley Blackwell, vol. 68(4), pages 986-1000, November.

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    More about this item

    Keywords

    temptation preferences; quasi-hyperbolic discounting; time inconsistency; life-cycle models; economic puzzles;
    All these keywords.

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • B21 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Microeconomics

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