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A trade-off from the future: How risk aversion may explain the demand for illiquid assets

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  • Ferraz, Eduardo
  • Mantilla, Cesar

Abstract

We use a three-period model adopting a recursive definition of consumption to explore the optimal delegation that a present self, aware that her near-future self is present-biased but better informed, will make to protect her far-future self against income shocks. The model captures the present self's trade-off between using commitment mechanisms, restricting the near-future self's agency through illiquid savings, and profiting from the near-future self's better information about future shocks. Our main result states that agents with higher risk aversion can cover better against utility losses from time-inconsistent consumption through the commitment mechanism. Given the evidence of women being more risk-averse than men, this result provides the micro-foundation for the gender gap in adopting financial commitment devices, especially among single individuals.

Suggested Citation

  • Ferraz, Eduardo & Mantilla, Cesar, 2022. "A trade-off from the future: How risk aversion may explain the demand for illiquid assets," OSF Preprints xbsn8_v1, Center for Open Science.
    • Handle: RePEc:osf:osfxxx:xbsn8_v1
    DOI: 10.31219/osf.io/xbsn8_v1
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