Durable goods as commitment devices under quasi-hyperbolic discounting

Abstract

Why do some people prefer owning durable goods instead of renting? We show that owning durable goods provides a commitment incentive for a consumer with time inconsistent preferences and helps maximize her utility. Previous research on time inconsistent preferences has focused on the role of financial assets as a commitment device and showed that illiquid financial assets cannot play such a commitment role. In this paper, we incorporate durable goods into the quasi-hyperbolic discounting model and show that the price of durable goods reflects a positive commitment premium. Our finding of the commitment incentive in durable goods provides a possible explanation of why owning rather than renting durable goods is a better idea for consumers.