Present Bias and Debt-Financed Durable Goods

Harvard Law School John M. Olin Center Discussion Paper No. 1055

Virginia Law and Economics Research Paper No. 2021-06

27 Pages Posted: 10 Mar 2021

See all articles by Oren Bar-Gill

Oren Bar-Gill

Harvard Law School

Andrew T. Hayashi

University of Virginia School of Law

Date Written: February 23, 2021

Abstract

There is concern that present-biased agents incur too much debt because of its deferred costs – concern that has influenced regulation of consumer credit. While this concern is valid when debt is used to finance current consumption, credit may increase efficiency when it is used to fund durable good purchases, which is the most common use of debt. Without debt, present-biased agents underconsume durable goods because of their deferred benefits. The deferred cost of debt can offset the deferred benefit from the durable good. We study the effects of purchase-financing on the demand for durable goods by present-biased agents.

Keywords: Consumer credit, durable goods, present bias

JEL Classification: D90, K0, G51

Suggested Citation

Bar-Gill, Oren and Hayashi, Andrew T., Present Bias and Debt-Financed Durable Goods (February 23, 2021). Harvard Law School John M. Olin Center Discussion Paper No. 1055, Virginia Law and Economics Research Paper No. 2021-06, Available at SSRN: https://ssrn.com/abstract=3790736

Oren Bar-Gill (Contact Author)

Harvard Law School ( email )

1575 Massachusetts
Hauser 406
Cambridge, MA 02138
United States

Andrew T. Hayashi

University of Virginia School of Law ( email )

580 Massie Road
Charlottesville, VA 22903
United States

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