Present Bias and Debt-Financed Durable Goods
Harvard Law School John M. Olin Center Discussion Paper No. 1055
27 Pages Posted: 10 Mar 2021
Date Written: February 23, 2021
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: Suggested Citation