Temptation and Self-Control: Some Evidence from the Consumer Expenditure Survey

33 Pages Posted: 1 Feb 2005

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

John Qi Zhu

Date Written: January 2005

Abstract

This paper empirically estimates a balanced-growth consistent, dynamic, structural model of intertemporal consumption and asset pricing that allows for, but does not assume, the Gul-Pesendorfer preferences of temptation and self-control, using synthetic panel data constructed from the Consumer Expenditure Survey. One novelty of our model is that the cross-sectional distribution of wealth-consumption ratio is a potentially important determinant for the implied pricing kernel, additional to the cross-sectional distribution of consumption growth, while the importance of this additional factor depends on the strength of temptation and self-control. The estimates that we obtain provide evidence supporting the existence of temptation and self-control in preferences. With reasonable precision, we estimate a significant present-biased temptation strength, and we reject the null hypothesis of no temptation at common confidence levels. We explore the quantitative implications of the self-control problems for equity premium, risk-free rate, and asset price volatility.

Keywords: Temptation, Self-control, Gul-Pesendorfer preferences, Asset pricing

JEL Classification: E44, C11, G12

Suggested Citation

Huang, Kevin X. D. and Liu, Zheng and Zhu, John Qi, Temptation and Self-Control: Some Evidence from the Consumer Expenditure Survey (January 2005). Available at SSRN: https://ssrn.com/abstract=658303 or http://dx.doi.org/10.2139/ssrn.658303

Kevin X. D. Huang

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 (Contact Author)

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

101 Market Street
San Francisco, CA 94105
United States

No contact information is available for John Qi Zhu

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