Download This PaperExploitative Contracting in a Life Cycle Savings Model
47 Pages Posted: 10 Jan 2020 Last revised: 28 Oct 2024
Date Written: October 25, 2024
Abstract
This paper analyses the interaction between a present-biased saver and profit-maximising financial providers. Using a tractable theoretical model, I find that a naive present-biased agent selects an `inefficiently cheap' (low-yield, low-fee) contract when the income effect of an interest rate change is sufficiently strong, and an `inefficiently expensive' (high-yield, high-fee) contract otherwise. Subsequently, I embed the contract choice in a calibrated life-cycle model. Given the extent of present bias, exploitative contracting reduces the naive agent's pension wealth by 8%, lowering expected annual consumption in retirement by 3%. The associated loss of consumer welfare corresponds to 0.23% of annual consumption.
Keywords: Exploitative contracting. Life cycle model. Saving. Present bias., Saving, Life cycle model, Present bias
JEL Classification: D14, D15, D86, D91, E21, G51
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