Temptation and Commitment: Understanding Hand-to-Mouth Behavior / 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. w27944.

NBER working paper series no. w27944

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2020.

Summary:

This paper presents a model of consumption behavior that explains the presence of 'wealthy hand-to-mouth' consumers using a mechanism that differs from those analyzed previously. We show that a two-asset model with temptation preferences generates a demand for commitment and thus illiquidity, leading to hand-to-mouth behavior even when liquid assets deliver higher returns than illiquid assets. This model fits other features of the data, such as the fact that the Marginal Propensity to Consume declines only slowly with shock size. Moreover, temptation and commitment have important policy implications: we show that housing subsidies and mandatory mortgage amortization increase household savings.

Notes:

Print version record

October 2020.