Temptation and Self-Control: Some Evidence and Applications

Posted: 25 Jul 2008

See all articles by Kevin X. D. Huang

Kevin X. D. Huang

Federal Reserve Bank of Philadelphia; Vanderbilt University - College of Arts and Science - Department of Economics

Zheng Liu

Federal Reserve Banks - Federal Reserve Bank of San Francisco

Qi Zhu

affiliation not provided to SSRN

Date Written: January 1, 2006

Abstract

This paper studies the empirical relevance of temptation and self-control using household-level data from the Consumer Expenditure Survey. We estimate an infinite-horizon consumption-savings model that allows, but does not require, temptation and self-control in preferences. To help identify the presence of temptation, we exploit an implication of the theory that a tempted individual has a preference for commitment. In the presence of temptation, the cross-sectional distribution of the wealth-consumption ratio, in addition to that of consumption growth, becomes a determinant of the asset-pricing kernel, and the importance of this additional pricing factor depends on the strength of temptation. The estimates that we obtain provide statistical evidence supporting the presence of temptation. Based on our estimates, we explore some quantitative implications of this class of preferences on equity premium and on the welfare cost of business cycles.

Keywords: Temptation, Self-Control, Limited Participation, Asset Pricing, Welfare

JEL Classification: D91, E21, G12

Suggested Citation

Huang, Kevin X. D. and Liu, Zheng and Zhu, Qi, Temptation and Self-Control: Some Evidence and Applications (January 1, 2006). Available at SSRN: https://ssrn.com/abstract=1171792

Kevin X. D. Huang (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Vanderbilt University - College of Arts and Science - Department of Economics ( email )

Box 1819 Station B
Nashville, TN 37235
United States

Zheng Liu

Federal Reserve Banks - Federal Reserve Bank of San Francisco ( email )

101 Market Street
San Francisco, CA 94105
United States

Qi Zhu

affiliation not provided to SSRN

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