Dynamically Inconsistent Preferences and Money Demand
18 Pages Posted: 7 Sep 2008
Date Written: September 5, 2008
This paper focuses on two main issues. First, we find that, on average, households' discount rates decline. This implies dynamically inconsistent preferences. Second, we calculate an indicator of the degree of dynamic inconsistency that may help us to understand how households overcome their self-control problems. We use a micro dataset containing households' reports on the compensation for receiving hypothetical rewards with delays. We find that individuals with more severely dynamically inconsistent preferences on average hold a statistically significantly lower share of their total wealth in checking accounts. A possible interpretation is that subjects use precommitment strategies to limit their temptation to consume immediately.
Keywords: Behavioral Economics, Intertemporal choice, Hyperbolic Discounting, Dynamic Inconsistency, Precommitment
JEL Classification: D11, D12, D90
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