How risk aversion shapes the trade-off between commitment and flexibility

Eduardo Ferraz and César Mantilla

Journal of Economic Behavior & Organization, 2024, vol. 227, issue C

Abstract: We use a three-period model to explore the optimal asset transfer 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 illiquid savings as a commitment mechanism, restricting the near future self from its consumption temptations; and giving flexibility to the near future self to adjust consumption after knowing the shock size. We adopt a class of utility functions, à la Epstein–Zin, to vary risk aversion while holding time preferences fixed. Our main result states that a more risk-averse agent would purchase more illiquid assets.

Keywords: Choice reversals; 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)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0167268124003627
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:jeborg:v:227:y:2024:i:c:s0167268124003627

DOI: 10.1016/j.jebo.2024.106748

Access Statistics for this article

Journal of Economic Behavior & Organization is currently edited by Houser, D. and Puzzello, D.

More articles in Journal of Economic Behavior & Organization from Elsevier
Bibliographic data for series maintained by Catherine Liu ().