Intertemporal Choice and Legal Constraints

Alan Schwartz

Yale Law School

M. Keith Chen

University of California, Los Angeles (UCLA) - Anderson School of Management; Yale School of Management; Cowles Foundation

April 6, 2009

Yale Law & Economics Research Paper No. 381

We study the effect of legal constraints in an environment in which agents face demand shocks they would like to smooth, but the agents also have weakness of will: their long and short run preferences are misaligned. Some agents are sophisticated - they know they will make inconsistent intertemporal choices - while other agents are naive. The consequent public policy problem is complex. The state apparently should facilitate consumer borrowing, to help agents cushion the effect of shocks, but also should facilitate pre-commitment, to help agents control excessive present-based preferences. We show that naive and sophisticated agents make similar consumption/savings choices, which simplifies the policy problem. We also show that agents with relatively strong present-based preferences who face relatively mild consumption shocks will borrow to finance excessive current consumption. Other agents save appropriately. Legal constraints that severely restrict agents' access to credit thus would be overinclusive. Offering agents access to both a liquid and an illiquid savings vehicle is welfare improving relative to allowing agents complete freedom to borrow or strongly restricting their access to the credit market.

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Date posted: May 4, 2009 ; Last revised: June 15, 2009

Suggested Citation

Schwartz, Alan and Chen, M. Keith, Intertemporal Choice and Legal Constraints (April 6, 2009). Yale Law & Economics Research Paper No. 381. Available at SSRN: http://ssrn.com/abstract=1396333 or http://dx.doi.org/10.2139/ssrn.1396333

Contact Information

Alan Schwartz (Contact Author)
Yale Law School ( email )
P.O. Box 208215
New Haven, CT 06520-8215
United States
203-432-4030 (Phone)
203-432-8260 (Fax)
Keith Chen
University of California, Los Angeles (UCLA) - Anderson School of Management ( email )
110 Westwood Plaza
Los Angeles, CA 90095-1481
United States
HOME PAGE: http://www.anderson.ucla.edu/faculty/keith.chen/index.html
Yale School of Management ( email )
135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States
203-432-6049 (Phone)
HOME PAGE: http://www.som.yale.edu/faculty/keith.chen
Cowles Foundation
Box 208281
New Haven, CT 06520-8281
United States
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