Abstract
This paper investigates time-consistent plans by incorporating the reference-dependent consumption model with endogenous labor supply. To what extent these plans can help the consumer overcome the double self-control problems of over-consumption and late-retirement is discussed. The consumption level and labor supply of the preferred personal equilibrium solution are compared with those of ex-ante optimal solution and present-biased solution. For all preferred personal equilibrium plans, both consumption level and labor supply are lower than those of the consumer who is present-biased but without reference-dependent preference. Although the preferred personal equilibrium solutions do not include the ex-ante optimal level, they help mitigate the welfare loss caused by present bias.
Highlights
People usually desire immediate gratification but underrate the wellbeing in the future
This paper investigates the preferred personal equilibrium (PPE) solutions corresponding to each degree of present bias by jointly considering consumption and working behavior
The main novel point which makes the results of this paper different from Köszegi and Rabin (2009) [6] and other studies is that endogenous labor supply is incorporated
Summary
People usually desire immediate gratification but underrate the wellbeing in the future. L. Zhang vestigate that to what extent the double problems of over-consumption and late-retirement can be mitigated by a single time-consistent plan of an individual with reference-dependent consumption preference. Zhang vestigate that to what extent the double problems of over-consumption and late-retirement can be mitigated by a single time-consistent plan of an individual with reference-dependent consumption preference In this model, quasi-hyperbolic discounting is employed to approximate present-biased preference. The main novel point which makes the results of this paper different from Köszegi and Rabin (2009) [6] and other studies is that endogenous labor supply is incorporated In this model the consumer who makes time-consistent plans is facing double self-control problems: over-consumption and late-retirement at the same time. The reference-dependent preference is domain dependent in that only the consumption involves gain-loss utility
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