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

Eduardo Ferraz Castelo Branco Ferreira and César Mantilla

Working papers from Red Investigadores de Economía

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.

Keywords: commitment devices; dynamic inconsistency; Epstein-Zin preferences; present bias (search for similar items in EconPapers)
JEL-codes: D11 D81 D90 G40 (search for similar items in EconPapers)
Pages: 27
Date: 2022-09
New Economics Papers: this item is included in nep-fdg, nep-rmg and nep-upt
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Working Paper: A trade-off from the future: How risk aversion may explain the demand for illiquid assets (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:rie:riecdt:97

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