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Self-Control and the Theory of Consumption

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  • Faruk Gul
  • Wolfgang Pesendorfer

Abstract

To study the behavior of agents who are susceptible to temptation in infinite horizon consumption problems under uncertainty, we define and characterize dynamic self-control (DSC) preferences. DSC preferences are recursive and separable. In economies with DSC agents, equilibria exist but may be inefficient; in such equilibria, steady state consumption is independent of initial endowments and increases in self-control. Increasing the preference for commitment while keeping self-control constant increases the equity premium. Removing nonbinding constraints changes equilibrium allocations and prices. Debt contracts can be sustained even if the only feasible punishment for default is the termination of the contract. Copyright Econometric Society 2004.

Suggested Citation

  • Faruk Gul & Wolfgang Pesendorfer, 2004. "Self-Control and the Theory of Consumption," Econometrica, Econometric Society, vol. 72(1), pages 119-158, January.
    • Handle: RePEc:ecm:emetrp:v:72:y:2004:i:1:p:119-158
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    References listed on IDEAS

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    1. Piccione, Michele & Rubinstein, Ariel, 1997. "On the Interpretation of Decision Problems with Imperfect Recall," Games and Economic Behavior, Elsevier, vol. 20(1), pages 3-24, July.
    2. Ted O'Donoghue & Matthew Rabin, 1999. "Incentives for Procrastinators," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 114(3), pages 769-816.
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