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The Shape of Temptation: Implications for the Economic Lives of the Poor | CFSP | Consortium on Financial Systems and Poverty

The Shape of Temptation: Implications for the Economic Lives of the Poor

Abhijit Banerjee
Sendhil Mullainathan
Publication Type: 
Working Papers
Publication Year: 
2010

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.

JEL Codes: 
D03, D91, O12
Region: 
Global
Country: 
Global
Topic: 
Economic Modeling
Topic: 
Savings
Topic: 
Credit
Topic: 
Risk
Topic: 
Consumption