19 February 2021

New study explores the impact of self-control problems on household saving

To what extent do households suffer from self-control problems that make it difficult to save? This question has important implications for a large number of policies, ranging from retirement saving subsidies to the regulation of credit cards and other financial products.

To help inform the design of these policies, a new paper estimates the importance of self-control problems using the observed consumption smoothing and asset accumulation behaviour of households.

Assistant Professor Patrick Moran, who carried out the project with Agnes Kovacs and Hamish Low, said: ‘We estimate a heterogeneous agent model of consumption and saving behaviour over the life cycle, where we allow for the possibility that households suffer from temptation that makes it difficult to save.’

‘We use two complementary estimation strategies to evaluate the importance of temptation. First, we estimate preference parameters using data on consumption growth dynamics, exploiting the fact that temptation has testable implications for consumption growth. Second, we match data on liquid and illiquid wealth accumulation during the working life, exploiting the fact that temptation implies a desire for illiquidity which would be absent in a standard model.’

Dr Moran added: ‘In both cases, we find that the cost of temptation is roughly one-quarter of the utility benefit of consumption. Temptation helps the model match the fact that household wealth accumulation occurs predominantly using illiquid assets such as housing and pensions. Moreover, allowing for temptation is crucial for correctly estimating the elasticity of intertemporal substitution.’

The paper ‘Estimating temptation and commitment over the life cycle’ by Patrick Moran and co-author's is published in the International Economic Review.

The research is co-authored by Professor Agnes Kovacs at the University of Manchester, Professor Hamish Low at the University of Oxford, and Professor Patrick Moran at the University of Copenhagen and Center for Economic Behavior and Inequality.

 You can read the full research paper here