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Dynamically Inconsistent Preferences and Money Demand

This paper focuses on two main issues. First, we find that, on average, households’ discount rates decline. This implies dynamically inconsistent preferences. Second, we calculate an indicator of the degree of dynamic inconsistency that may help us to understand how households overcome their self-control problems. We use a micro dataset containing households’ reports on the compensation for receiving hypothetical rewards with delays. We find that individuals with more severely dynamicly inconsistent preferences on average hold a statistically significantly lower share of their total wealth in checking accounts. A possible interpretation is that subjects use precommitment strategies to limit their temptation to consume immediately.

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Paper provided by Tor Vergata University, CEIS in its series CEIS Research Paper with number 129.

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Length: 18 pages
Date of creation: 09 Sep 2008
Date of revision: 09 Sep 2008
Handle: RePEc:rtv:ceisrp:129
Contact details of provider: Postal: CEIS - Centre for Economic and International Studies - Faculty of Economics - University of Rome "Tor Vergata" - Via Columbia, 2 00133 Roma
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  1. Giamboni, Luigi & Millemaci, Emanuele & Waldmann, Robert, 2007. "Evaluating how predictable errors in expected income affect consumption," MPRA Paper 12939, University Library of Munich, Germany.
  2. Laibson, David I., 1997. "Golden Eggs and Hyperbolic Discounting," Scholarly Articles 4481499, Harvard University Department of Economics.
  3. Ted O' Donoghue and Matthew Rabin., 2000. "Choice and Procrastination," Economics Working Papers E00-281, University of California at Berkeley.
  4. Donkers, Bas & van Soest, Arthur, 1999. "Subjective measures of household preferences and financial decisions," Journal of Economic Psychology, Elsevier, vol. 20(6), pages 613-642, December.
  5. Ted O'Donoghue and Matthew Rabin ., 1997. "Doing It Now or Later," Economics Working Papers 97-253, University of California at Berkeley.
  6. Kahneman, Daniel & Thaler, Richard H, 1991. "Economic Analysis and the Psychology of Utility: Applications to Compensation Policy," American Economic Review, American Economic Association, vol. 81(2), pages 341-46, May.
  7. Shane Frederick & George Loewenstein & Ted O'Donoghue, 2002. "Time Discounting and Time Preference: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 40(2), pages 351-401, June.
  8. 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.
  9. David Laibson, 2001. "A Cue-Theory Of Consumption," The Quarterly Journal of Economics, MIT Press, vol. 116(1), pages 81-119, February.
  10. George-Marios Angeletos, 2001. "The Hyberbolic Consumption Model: Calibration, Simulation, and Empirical Evaluation," Journal of Economic Perspectives, American Economic Association, vol. 15(3), pages 47-68, Summer.
  11. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-87, December.
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