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How risk aversion shapes the trade-off between commitment and flexibility

  • Eduardo Ferraz
  • , César Mantilla

    Research output: Contribution to Journal › Research Article › peer-review

    Abstract

    We use a three-period model to explore the optimal asset transfer that a present self, aware that her near future self is present-biased but better informed, will make to protect her far future self against income shocks. The model captures the present self's trade-off between using illiquid savings as a commitment mechanism, restricting the near future self from its consumption temptations; and giving flexibility to the near future self to adjust consumption after knowing the shock size. We adopt a class of utility functions, à la Epstein–Zin, to vary risk aversion while holding time preferences fixed. Our main result states that a more risk-averse agent would purchase more illiquid assets.

    Original languageEnglish
    Article number106748
    JournalJournal of Economic Behavior and Organization
    Volume227
    DOIs
    StatePublished - Jan 2024

    UN SDGs

    This output contributes to the following UN Sustainable Development Goals (SDGs)

    1. SDG 9 - Industry, Innovation, and Infrastructure
      SDG 9 Industry, Innovation, and Infrastructure

    All Science Journal Classification (ASJC) codes

    • Economics and Econometrics

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