The Shape of Temptation: Implications for the Economic Lives of the Poor

Abhijit Banerjee and Sendhil Mullainathan

No 7828, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper argues that the relation between temptations and the level of consumption plays a key role in explaining the observed behaviors of the poor. Temptation goods are defined to be the set of goods that generate positive utility for the self that consumes them, but not for any previous self that anticipates that they will be consumed in the future. We show that the assumption of declining temptations, which says that the fraction of the marginal dollar that is spent on temptation goods decreases with overall consumption, has a number of striking implications for the investment, savings, borrowing and risk-taking behavior of the poor, which would not arise if temptations were either non-declining or entirely absent. Moreover the predicted behaviors under the declining temptation assumption can help us explain some of the puzzling facts about the poor that have been emphasized in the recent literature.

Keywords: Self-control problems; Asset markets; The poor (search for similar items in EconPapers)
JEL-codes: D03 D91 O12 (search for similar items in EconPapers)
Date: 2010-05
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Citations: View citations in EconPapers (212)

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Working Paper: The Shape of Temptation: Implications for the Economic Lives of the Poor (2010)
Working Paper: The Shape of Temptation: Implications for the Economic Lives of the Poor (2010)
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