Temptation and Self-Control: Some Evidence and Applications


Kevin X.D. Huang

John Q. Zhu

Download PDF
(414 KB)

2013-23 | August 1, 2013

This paper studies the empirical relevance of temptation and self-control using household-level data from the Consumer Expenditure Survey. We construct an infinite-horizon consumption-savings model that allows, but does not require, temptation and self-control in preferences. In the presence of temptation, a wealth-consumption ratio, in addition to consumption growth, becomes a determinant of the asset-pricing kernel, and the importance of this additional pricing factor depends on the strength of temptation. To identify the presence of temptation, we exploit an implication of the theory that a more tempted individual should be more likely to hold commitment assets such as IRA or 401(k) accounts. Our estimation provides empirical support for temptation preferences. Based on our estimates, we explore some quantitative implications of this class of preferences for capital accumulation in a neoclassical growth model and the welfare cost of the business cycle.

Article Citation

Zhu, John Q., Kevin X.D. Huang, and Zheng Liu. 2013. “Temptation and Self-Control: Some Evidence and Applications,” Federal Reserve Bank of San Francisco Working Paper 2013-23. Available at https://doi.org/10.24148/wp2013-23

About the Author
Zheng Liu
Zheng Liu is a vice president and director of the Center for Pacific Basin Studies in the Economic Research Department of the Federal Reserve Bank of San Francisco. Learn more about Zheng Liu