Temptation and Incentives to Wealth Accumulation

Orazio Attanasio, Agnes Kovacs and Patrick Moran

No 28938, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We propose a rich model of household behavior to study the effect of two important policies: mortgage interest tax deduction and mandatory mortgage amortization. These policies have attracted some controversy, first because they are conceived to increase overall saving, an objective that the literature does not agree they can achieve, and second because they incentivize illiquid savings and may thus increase the share of ‘wealthy hand-to-mouth’ households. We build a life-cycle model where housing may act as a commitment device to counteract present biases arising from temptation. We show that the model matches several empirical facts, including the large share of wealthy hand-to-mouth households. We evaluate the effect of the two policies and find that they increase wealth accumulation by 7 and 10% respectively. Our results demonstrate that these policies not only induce portfolio re-balancing, as emphasized by the previous literature, but also increase savings by making commitment more accessible.

JEL-codes: D11 D14 D91 E21 R21 (search for similar items in EconPapers)
Date: 2021-06
New Economics Papers: this item is included in nep-dge, nep-ltv and nep-mac
Note: EFG PE
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