Temptation and Incentives to Wealth Accumulation / Orazio Attanasio, Agnes Kovacs, Patrick Moran.

Format:

Book

Author/Creator:

Attanasio, Orazio.

Contributor:

National Bureau of Economic Research.

Kovacs, Agnes.

Moran, Patrick.

Series:

Working Paper Series (National Bureau of Economic Research) no. w28938.

NBER working paper series no. w28938

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2021.

Summary:

We propose a rich model of household behavior to study the effect of two important policies: mortgage interest tax deduction and mandatory mortgage amortization. These policies have attracted some controversy, first because they are conceived to increase overall saving, an objective that the literature does not agree they can achieve, and second because they incentivize illiquid savings and may thus increase the share of 'wealthy hand-to-mouth' households. We build a life-cycle model where housing may act as a commitment device to counteract present biases arising from temptation. We show that the model matches several empirical facts, including the large share of wealthy hand-to-mouth households. We evaluate the effect of the two policies and find that they increase wealth accumulation by 7 and 10% respectively. Our results demonstrate that these policies not only induce portfolio re-balancing, as emphasized by the previous literature, but also increase savings by making commitment more accessible.

Notes:

Print version record

June 2021.