A trade-off from the future: How risk aversion may explain the demand for illiquid assets
Authors
Ferraz, Eduardo
Mantilla, César
Editor
Publication date
2022-09-13
Document language
eng
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Abstract
We use a three-period model adopting a recursive definition of consumption to explore the optimal delegation that a present self, aware that her near-future self is present-biased but better informed, will make to protect her far-future self against income shocks. The model captures the present self's trade-off between using commitment mechanisms, restricting the near-future self's agency through illiquid savings, and profiting from the near-future self's better information about future shocks. Our main result states that agents with higher risk aversion can cover better against utility losses from time-inconsistent consumption through the commitment mechanism. Given the evidence of women being more risk-averse than men, this result provides the micro-foundation for the gender gap in adopting financial commitment devices, especially among single individuals.
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Códigos JEL
D11 - Consumer Economics: Theory, D81 - Criteria for Decision-Making under Risk and Uncertainty, D90 - Micro-Based Behavioral Economics: General, G40 - Behavioral Finance: General
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Keywords
commitment devices, dynamic inconsistency, Epstein-Zin preferences, present bias
