IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this paper

Temptation and Self-Control: Some Evidence and Applications

  • Kevin X.D. Huang

    ()

    (Department of Economics, Vanderbilt University)

  • Zheng Liu

    ()

    (Department of Economics, Emory University)

  • John Q. Zhu

    ()

    (Department of Economics, Emory University)

This paper studies the empirical relevance of temptation and self-control using household-level data from the Consumer Expenditure Survey. We construct an infinite-horizon consumption-savings model that allows, but does not require, temptation and self-control in preferences. To distinguish temptation preferences from others, we exploit individual-level heterogeneities in our data set, and we rely on an implication of the theory that a more tempted individual should be more likely to hold commitment assets. In the presence of temptation, the cross-sectional distribution of the wealth-consumption ratio, in addition to that of consumption growth, becomes a determinant of the asset-pricing kernel, and the importance of this additional pricing factor depends on the strength of temptation. The empirical estimates that we obtain provide statistical evidence supporting the presence of temptation. Based on our estimates, we explore some quantitative implications of this class of preferences for capital accumulation in a neoclassical growth model and the welfare cost of the business cycle.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.accessecon.com/pubs/VUECON/vu07-w11.pdf
File Function: First version, 2007
Download Restriction: no

Paper provided by Vanderbilt University Department of Economics in its series Vanderbilt University Department of Economics Working Papers with number 0711.

as
in new window

Length:
Date of creation: Aug 2007
Date of revision:
Handle: RePEc:van:wpaper:0711
Contact details of provider: Web page: http://www.vanderbilt.edu/econ/wparchive/index.html

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Charles Noussair & Ping Wu, 2006. "Risk tolerance in the present and the future: an experimental study," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 27(6), pages 401-412.
  2. Lars Peter Hansen & Ravi Jagannathan, 1990. "Implications of Security Market Data for Models of Dynamic Economies," NBER Technical Working Papers 0089, National Bureau of Economic Research, Inc.
  3. Hall, Robert E, 1988. "Intertemporal Substitution in Consumption," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 339-57, April.
  4. Per Krusell & Anthony A Smith, Jr., 2001. "Consumption Savings Decisions with Quasi-Geometric Discounting," NajEcon Working Paper Reviews 625018000000000251, www.najecon.org.
  5. Christopher D Carroll, 1997. "Death to the Log-Linearized Consumption euler Equation! (And Very Poor Health to the Second-Order Approximation)," Economics Working Paper Archive 390, The Johns Hopkins University,Department of Economics.
  6. B. Douglas Bernheim & Antonio Rangel, 2002. "Addiction and Cue-Conditioned Cognitive Processes," NBER Working Papers 9329, National Bureau of Economic Research, Inc.
  7. Paserman, M. Daniele, 2004. "Job Search and Hyperbolic Discounting: Structural Estimation and Policy Evaluation," IZA Discussion Papers 997, Institute for the Study of Labor (IZA).
  8. Alon Brav & George M. Constantinides & Christopher C. Geczy, 2002. "Asset Pricing with Heterogeneous Consumers and Limited Participation: Empirical Evidence," Journal of Political Economy, University of Chicago Press, vol. 110(4), pages 793-824, August.
  9. Orazio P. Attanasio & Hamish Low, 2000. "Estimating Euler Equations," NBER Technical Working Papers 0253, National Bureau of Economic Research, Inc.
  10. Mankiw, N.G. & Zeldes, S.P., 1990. "The Consumption Of Stockholders And Non-Stockholders," Weiss Center Working Papers 23-90, Wharton School - Weiss Center for International Financial Research.
  11. Haliassos, Michael & Bertaut, Carol C, 1995. "Why Do So Few Hold Stocks?," Economic Journal, Royal Economic Society, vol. 105(432), pages 1110-29, September.
  12. Sumru Altug & Robert A. Miller, 1987. "Household choices in equilibrium," Working Papers 341, Federal Reserve Bank of Minneapolis.
  13. Narayana R. Kocherlakota & Luigi Pistaferri, 2007. "Asset Pricing Implications of Pareto Optimality with Private Information," Levine's Bibliography 321307000000000701, UCLA Department of Economics.
  14. Ariel Rubinstein, 2003. ""Economics and Psychology"? The Case of Hyperbolic Discounting," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(4), pages 1207-1216, November.
  15. Annette Vissing-Jorgensen, 2002. "Limited Asset Market Participation and the Elasticity of Intertemporal Substitution," NBER Working Papers 8896, National Bureau of Economic Research, Inc.
  16. Zeldes, Stephen P, 1989. "Consumption and Liquidity Constraints: An Empirical Investigation," Journal of Political Economy, University of Chicago Press, vol. 97(2), pages 305-46, April.
  17. Angus Deaton & Christina Paxson, 1993. "Intertemporal Choice and Inequality," NBER Working Papers 4328, National Bureau of Economic Research, Inc.
  18. Angus Deaton, 1989. "Saving and Liquidity Constraints," NBER Working Papers 3196, National Bureau of Economic Research, Inc.
  19. Zheng Liu & Pengfei Wang & Tao Zha, 2011. "Land-price dynamics and macroeconomic fluctuations," Working Paper Series 2011-26, Federal Reserve Bank of San Francisco.
  20. Robert E. Hall, 2011. "The Long Slump," NBER Working Papers 16741, National Bureau of Economic Research, Inc.
  21. Constantinides, George M, 1990. "Habit Formation: A Resolution of the Equity Premium Puzzle," Journal of Political Economy, University of Chicago Press, vol. 98(3), pages 519-43, June.
  22. John Ameriks & Andrew Caplin & John Leahy & Tom Tyler, 2004. "Measuring Self-Control," NBER Working Papers 10514, National Bureau of Economic Research, Inc.
  23. Kris Jacobs, 1999. "Incomplete Markets and Security Prices: Do Asset-Pricing Puzzles Result from Aggregation Problems?," Journal of Finance, American Finance Association, vol. 54(1), pages 123-163, 02.
  24. Hanming Fang & Dan Silverman, 2004. "Time-inconsistency and Welfare Program Participation: Evidence from the NLSY," Cowles Foundation Discussion Papers 1465, Cowles Foundation for Research in Economics, Yale University.
  25. Krusell, Per & Kuruscu, Burhanettin & Smith, Anthony Jr., 2002. "Time orientation and asset prices," Journal of Monetary Economics, Elsevier, vol. 49(1), pages 107-135, January.
  26. Lettau, Martin & Ludvigson, Sydney, 1999. "Consumption, Aggregate Wealth and Expected Stock Returns," CEPR Discussion Papers 2223, C.E.P.R. Discussion Papers.
  27. Deaton, Angus, 1985. "Panel data from time series of cross-sections," Journal of Econometrics, Elsevier, vol. 30(1-2), pages 109-126.
  28. 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.
  29. Martin Lettau & Sydney Ludvigson, 2003. "Understanding Trend and Cycle in Asset Values: Reevaluating the Wealth Effect on Consumption," NBER Working Papers 9848, National Bureau of Economic Research, Inc.
  30. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
  31. Bakshi, Gurdip S & Chen, Zhiwu, 1996. "The Spirit of Capitalism and Stock-Market Prices," American Economic Review, American Economic Association, vol. 86(1), pages 133-57, March.
  32. Narayana R. Kocherlakota, 2001. "Looking for evidence of time-inconsistent preferences in asset market data," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 13-24.
  33. John Y. Campbell & John H. Cochrane, 1994. "By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," CRSP working papers 412, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  34. Annette Vissing-Jorgensen, 2002. "Limited Asset Market Participation and the Elasticity of Intertemporal Substitution," Journal of Political Economy, University of Chicago Press, vol. 110(4), pages 825-853, August.
  35. Timothy Cogley, 1998. "Idiosyncratic risk and the equity premium: evidence from the Consumer Expenditure Survey," Working Papers in Applied Economic Theory 98-07, Federal Reserve Bank of San Francisco.
  36. Matthew Rabin., 1997. "Psychology and Economics," Economics Working Papers 97-251, University of California at Berkeley.
  37. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
  38. Jesus Fernandez-Villaverde & Dirk Krueger, 2002. "Consumption over the Life Cycle: Some Facts from Consumer Expenditure Survey Data," Centro de Alti­simos Estudios Ri­os Pe©rez(CAERP) 7, Centro de Altisimos Estudios Rios Perez (CAERP).
  39. Heckman, James J. & Robb, Richard Jr., 1985. "Alternative methods for evaluating the impact of interventions : An overview," Journal of Econometrics, Elsevier, vol. 30(1-2), pages 239-267.
  40. Gadi Barlevy, 2004. "The Cost of Business Cycles and the Benefits of Stabilization: A Survey," NBER Working Papers 10926, National Bureau of Economic Research, Inc.
  41. Per Krusell & Burhanettin Kuruscu & Anthony A. Smith, Jr., 2000. "Temptation and Taxation," GSIA Working Papers 2001-12, Carnegie Mellon University, Tepper School of Business.
  42. George M. Constantinides, 2002. "Rational Asset Prices," NBER Working Papers 8826, National Bureau of Economic Research, Inc.
  43. Attanasio, Orazio P & Weber, Guglielmo, 1989. "Intertemporal Substitution, Risk Aversion and the Euler Equation for Consumption," Economic Journal, Royal Economic Society, vol. 99(395), pages 59-73, Supplemen.
  44. Campbell, John, 1993. "Intertemporal Asset Pricing Without Consumption Data," Scholarly Articles 3221491, Harvard University Department of Economics.
  45. Laibson, David I., 1997. "Golden Eggs and Hyperbolic Discounting," Scholarly Articles 4481499, Harvard University Department of Economics.
  46. Stefano DellaVigna & M. Daniele Paserman, 2005. "Job Search and Impatience," Journal of Labor Economics, University of Chicago Press, vol. 23(3), pages 527-588, July.
  47. Orazio Attanasio & Steven J. Davis, 1994. "Relative Wage Movements and the Distribution of Consumption," NBER Working Papers 4771, National Bureau of Economic Research, Inc.
  48. Sydney Ludvigson & Christina H. Paxson, 1997. "Approximation bias in linearized Euler equations," Research Paper 9712, Federal Reserve Bank of New York.
  49. Harris, Christopher & Laibson, David, 2001. "Dynamic Choices of Hyperbolic Consumers," Econometrica, Econometric Society, vol. 69(4), pages 935-57, July.
  50. Kris Jacobs & Kevin Q. Wang, 2004. "Idiosyncratic Consumption Risk and the Cross Section of Asset Returns," Journal of Finance, American Finance Association, vol. 59(5), pages 2211-2252, October.
  51. Benhabib, Jess & Bisin, Alberto, 2005. "Modeling internal commitment mechanisms and self-control: A neuroeconomics approach to consumption-saving decisions," Games and Economic Behavior, Elsevier, vol. 52(2), pages 460-492, August.
  52. Faruk Gul & Wolfgang Pesendorfer, 2004. "Self Control, Revealed Preferences and Consumption Choice," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(2), pages 243-264, April.
  53. 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.
  54. Matteo Iacoviello, 2002. "House prices, borrowing constraints and monetary policy in the business cycle," Boston College Working Papers in Economics 542, Boston College Department of Economics, revised 06 Dec 2004.
  55. Epstein, Larry G & Zin, Stanley E, 1989. "Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: A Theoretical Framework," Econometrica, Econometric Society, vol. 57(4), pages 937-69, July.
  56. Orazio P. Attanasio & Guglielmo Weber, 2010. "Consumption and Saving: Models of Intertemporal Allocation and Their Implications for Public Policy," NBER Working Papers 15756, National Bureau of Economic Research, Inc.
  57. Ravi Jagannathan & Narayana R. Kocherlakota, 1996. "Why should older people invest less in stock than younger people?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 11-23.
  58. Attanasio, Orazio P & Weber, Guglielmo, 1995. "Is Consumption Growth Consistent with Intertemporal Optimization? Evidence from the Consumer Expenditure Survey," Journal of Political Economy, University of Chicago Press, vol. 103(6), pages 1121-57, December.
  59. Orazio P. Attanasio & Guglielmo Weber, 1993. "Consumption Growth, the Interest Rate and Aggregation," Review of Economic Studies, Oxford University Press, vol. 60(3), pages 631-649.
  60. Hall, Robert E & Mishkin, Frederic S, 1982. "The Sensitivity of Consumption to Transitory Income: Estimates from Panel Data on Households," Econometrica, Econometric Society, vol. 50(2), pages 461-81, March.
  61. Epstein, Larry G & Zin, Stanley E, 1991. "Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: An Empirical Analysis," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 263-86, April.
  62. Loewenstein, George, 1996. "Out of Control: Visceral Influences on Behavior," Organizational Behavior and Human Decision Processes, Elsevier, vol. 65(3), pages 272-292, March.
  63. Alessandro Bucciol, 2012. "Measuring Self-Control Problems: A Structural Estimation," Journal of the European Economic Association, European Economic Association, vol. 10(5), pages 1084-1115, October.
  64. Cochrane, John H, 1991. "A Simple Test of Consumption Insurance," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 957-76, October.
  65. Kiyotaki, Nobuhiro & Moore, John, 1997. "Credit Cycles," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 211-48, April.
  66. Faruk Gul & Wolfgang Pesendorfer, 2001. "Temptation and Self-Control," Econometrica, Econometric Society, vol. 69(6), pages 1403-1435, November.
  67. Browning, Martin & Deaton, Angus & Irish, Margaret, 1985. "A Profitable Approach to Labor Supply and Commodity Demands over the Life-Cycle," Econometrica, Econometric Society, vol. 53(3), pages 503-43, May.
  68. Bezalel Peleg & Menahem E. Yaari, 1973. "On the Existence of a Consistent Course of Action when Tastes are Changing," Review of Economic Studies, Oxford University Press, vol. 40(3), pages 391-401.
  69. David I. Laibson, 1996. "Hyperbolic Discount Functions, Undersaving, and Savings Policy," NBER Working Papers 5635, National Bureau of Economic Research, Inc.
  70. Wolfgang Pesendorfer, 2002. "The Revealed Preference Theory of Changing Tastes," Annual Meeting Plenary 2002-3, Society for Economic Dynamics.
  71. Faruk Gul & Wolfgang Pesendorfer, 2007. "Harmful Addiction," Review of Economic Studies, Oxford University Press, vol. 74(1), pages 147-172.
  72. Faruk Gul & Wolfgang Pesendorfer, 2004. "Self-Control and the Theory of Consumption," Econometrica, Econometric Society, vol. 72(1), pages 119-158, 01.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:van:wpaper:0711. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (John P. Conley)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.