50 Pages Posted: 4 May 2010 Last revised: 15 May 2010
Date Written: April 29, 2010
This paper argues that the relation between temptations and the level of consumption plays a key role in explaining the observed behaviors of the poor. Temptation goods are defined to be the set of goods that generate positive utility for the self that consumes them, but not for any previous self that anticipates that they will be consumed in the future. We show that the assumption of declining temptations, which says that the fraction of the marginal dollar that is spent on temptation goods decreases with overall consumption, has a number of striking implications for the investment, savings, borrowing and risk-taking behavior of the poor, which would not arise if temptations were either non-declining or entirely absent. Moreover the predicted behaviors under the declining temptation assumption can help us explain some of the puzzling facts about the poor that have been emphasized in the recent literature.
Keywords: Self-Control Problems, Asset Markets, The Poor
JEL Classification: D03, D91, O12
Suggested Citation: Suggested Citation
Banerjee, Abhijit V. and Mullainathan, Sendhil, The Shape of Temptation: Implications for the Economic Lives of the Poor (April 29, 2010). MIT Department of Economics Working Paper No. 10-9. Available at SSRN: https://ssrn.com/abstract=1598547 or http://dx.doi.org/10.2139/ssrn.1598547