Temptation and commitment: understanding the demand for illiquidity

Agnes Kovacs () and Patrick Moran
Additional contact information
Agnes Kovacs: Institute for Fiscal Studies and University of Manchester

No W19/18, IFS Working Papers from Institute for Fiscal Studies

Abstract: The vast majority of household wealth in the U.S. is held in illiquid assets, primarily housing, making households vulnerable to unexpected income shocks. To rationalize this preference for illiquidity, we build a life-cycle model where households are tempted to consume their liquid wealth but can use illiquid housing as a savings commitment device. The importance of temptation and commitment is identi?ed using data on consumption, liquid assets, and housing wealth over the life-cycle. Our model matches observed portfolio choices and gives rise to a high demand for illiquid housing partially driven by the need for commitment. Preference for illiquidity has important implications for the consumption response to unexpected income shocks. Our model is able to replicate the recent empirical evidence that MPCs remain high in response to large shocks, a ?nding that cannot be explained by current heterogeneous agent models, but that has great signi?cance for ?scal stimulus targeting.

Date: 2019-07-01
New Economics Papers: this item is included in nep-dge and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://www.ifs.org.uk/uploads/WP201918.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found (https://www.ifs.org.uk/uploads/WP201918.pdf [302 Found]--> https://ifs.org.uk/uploads/WP201918.pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ifs:ifsewp:19/18

Ordering information: This working paper can be ordered from
The Institute for Fiscal Studies 7 Ridgmount Street LONDON WC1E 7AE

Access Statistics for this paper

More papers in IFS Working Papers from Institute for Fiscal Studies The Institute for Fiscal Studies 7 Ridgmount Street LONDON WC1E 7AE. Contact information at EDIRC.
Bibliographic data for series maintained by Emma Hyman ().