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The Shape of Temptation: Implications for the Economic Lives of the Poor

  • Banerjee, Abhijit
  • Mullainathan, Sendhil

This paper argues that the relation between temptations and the level of consumption plays a key role in explaining the observed behaviors of the poor. Temptation goods are defined to be the set of goods that generate positive utility for the self that consumes them, but not for any previous self that anticipates that they will be consumed in the future. We show that the assumption of declining temptations, which says that the fraction of the marginal dollar that is spent on temptation goods decreases with overall consumption, has a number of striking implications for the investment, savings, borrowing and risk-taking behavior of the poor, which would not arise if temptations were either non-declining or entirely absent. Moreover the predicted behaviors under the declining temptation assumption can help us explain some of the puzzling facts about the poor that have been emphasized in the recent literature.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7828.

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Date of creation: May 2010
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Handle: RePEc:cpr:ceprdp:7828
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  1. Abhijit V. Banerjee & Esther Duflo, 2007. "The Economic Lives of the Poor," Journal of Economic Perspectives, American Economic Association, vol. 21(1), pages 141-168, Winter.
  2. Christopher Udry & Santosh Anagol, 2006. "The Return to Capital in Ghana," Working Papers 932, Economic Growth Center, Yale University.
  3. Nava Ashraf & Dean Karlan & Wesley Yin, 2006. "Tying Odysseus to the Mast: Evidence from a Commitment Savings Product in the Philippines," The Quarterly Journal of Economics, MIT Press, vol. 121(2), pages 635-672, May.
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  9. Ted O'Donoghue and Matthew Rabin ., 1997. "Doing It Now or Later," Economics Working Papers 97-253, University of California at Berkeley.
  10. Katherine L. Milkman & Todd Rogers & Max H. Bazerman, 2009. "Highbrow Films Gather Dust: Time-Inconsistent Preferences and Online DVD Rentals," Management Science, INFORMS, vol. 55(6), pages 1047-1059, June.
  11. Drew Fudenberg & David K Levine, 2005. "A Dual Self Model of Impulse Control," Levine's Working Paper Archive 618897000000000876, David K. Levine.
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  13. Subramanian, Shankar & Deaton, Angus, 1996. "The Demand for Food and Calories," Journal of Political Economy, University of Chicago Press, vol. 104(1), pages 133-62, February.
  14. Laibson, David I., 1997. "Golden Eggs and Hyperbolic Discounting," Scholarly Articles 4481499, Harvard University Department of Economics.
  15. Abhijit V. Banerjee & Andrew F. Newman, 1990. "Occupational Choice and the Process of Development," Discussion Papers 911, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  16. Jonathan Gruber & Botond Köszegi, 2001. "Is Addiction "Rational"? Theory And Evidence," The Quarterly Journal of Economics, MIT Press, vol. 116(4), pages 1261-1303, November.
  17. Bhaduri, Amit, 1977. "On the Formation of Usurious Interest Rates in Backward Agriculture," Cambridge Journal of Economics, Oxford University Press, vol. 1(4), pages 341-52, December.
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