Present-biased preferences and the effect of illiquid assets

Rong Tang, Shi Pu and Shou Chen

Economics Letters, 2024, vol. 244, issue C

Abstract: This paper incorporates liquidity constraints into a discrete three-stage model to investigate the consumption-savings decisions of present-biased agents. We derive the analytical solution for consumption choices of sophisticated and naive agents who hold illiquid assets that are untradable until the last period. Then, we investigate how the proportion of illiquid assets, liquidity premium and agents’ preferences affect the consumption of both agents. Our findings reveal that naive agents not always consume more than their sophisticated counterparts. Moreover, we theoretically find that illiquid assets may improve the welfare of agents and have a pre-commitment effect on both agents.

Keywords: Present bias; Illiquid asset; Liquidity premium; Consumption-savings decisions; Pre-commitment effect (search for similar items in EconPapers)
JEL-codes: D11 D61 D91 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0165176524005056
Full text for ScienceDirect subscribers only

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:eee:ecolet:v:244:y:2024:i:c:s0165176524005056

DOI: 10.1016/j.econlet.2024.112021

Access Statistics for this article

Economics Letters is currently edited by Economics Letters Editorial Office

More articles in Economics Letters from Elsevier
Bibliographic data for series maintained by Catherine Liu ().