Working Paper: CEPR ID: DP7828
Authors: Abhijit Banerjee; Sendhil Mullainathan
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
JEL Codes: D03; D91; O12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| overall consumption (E20) | fraction of income spent on temptation goods (D12) |
| overall consumption (E20) | savings behavior (D14) |
| declining temptation assumption (D15) | behavioral poverty trap (I32) |
| wealth levels (D31) | savings behavior (D14) |
| higher temptation tax (H26) | suboptimal savings and investment behaviors (D14) |
| sin taxes on temptation goods (H27) | overall consumption (E20) |
| sin taxes on temptation goods (H27) | share of expenditure on temptation goods (D12) |
| higher temptation tax (H26) | discourages saving for investment (E21) |