When expectations become aspirations: reference-dependent preferences and liquidity constraints
A large body of literature suggests that consumers derive utility from gains and losses relative to a reference point. This paper shows that such reference dependence can affect savings in opposite directions depending on whether people face liquidity constraints. Existing models for wealth and inte...
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| Formato: | Journal Article |
| Lenguaje: | Inglés |
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Springer
2016
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| Acceso en línea: | https://hdl.handle.net/10568/148625 |
| _version_ | 1855534355230752768 |
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| author | Kramer, Berber |
| author_browse | Kramer, Berber |
| author_facet | Kramer, Berber |
| author_sort | Kramer, Berber |
| collection | Repository of Agricultural Research Outputs (CGSpace) |
| description | A large body of literature suggests that consumers derive utility from gains and losses relative to a reference point. This paper shows that such reference dependence can affect savings in opposite directions depending on whether people face liquidity constraints. Existing models for wealth and intertemporal choice predict that reference dependence reduces savings, but these models abstract from liquidity constraints. Introducing a liquidity constraint, I find that reference dependence can increase optimal savings for people without access to credit. Ex post, after reference points have been formed, liquidity constraints force consumers to take part of an income loss in early periods, inducing those who are reference dependent to concentrate the full loss in early periods and save in order to eliminate future losses. Further, anticipating a liquidity constraint raises the expected level of future consumption and thus the expectations-based reference point for future periods, creating an ex-ante savings motive. These findings underscore that it is important to account for financial market imperfections when applying or testing reference-dependent models in low-income settings, and potentially explain heterogeneity in how much the poor save when facing binding liquidity constraints. |
| format | Journal Article |
| id | CGSpace148625 |
| institution | CGIAR Consortium |
| language | Inglés |
| publishDate | 2016 |
| publishDateRange | 2016 |
| publishDateSort | 2016 |
| publisher | Springer |
| publisherStr | Springer |
| record_format | dspace |
| spelling | CGSpace1486252025-12-08T10:29:22Z When expectations become aspirations: reference-dependent preferences and liquidity constraints Kramer, Berber microeconomics losses markets finance A large body of literature suggests that consumers derive utility from gains and losses relative to a reference point. This paper shows that such reference dependence can affect savings in opposite directions depending on whether people face liquidity constraints. Existing models for wealth and intertemporal choice predict that reference dependence reduces savings, but these models abstract from liquidity constraints. Introducing a liquidity constraint, I find that reference dependence can increase optimal savings for people without access to credit. Ex post, after reference points have been formed, liquidity constraints force consumers to take part of an income loss in early periods, inducing those who are reference dependent to concentrate the full loss in early periods and save in order to eliminate future losses. Further, anticipating a liquidity constraint raises the expected level of future consumption and thus the expectations-based reference point for future periods, creating an ex-ante savings motive. These findings underscore that it is important to account for financial market imperfections when applying or testing reference-dependent models in low-income settings, and potentially explain heterogeneity in how much the poor save when facing binding liquidity constraints. 2016-02-05 2024-06-21T09:25:15Z 2024-06-21T09:25:15Z Journal Article https://hdl.handle.net/10568/148625 en https://hdl.handle.net/10568/150570 Open Access Springer Kramer, Berber. 2016. When expectations become aspirations: reference-dependent preferences and liquidity constraints. Economic Theory 61(4): 685 - 721. https://doi.org/10.1007/s00199-015-0949-9 |
| spellingShingle | microeconomics losses markets finance Kramer, Berber When expectations become aspirations: reference-dependent preferences and liquidity constraints |
| title | When expectations become aspirations: reference-dependent preferences and liquidity constraints |
| title_full | When expectations become aspirations: reference-dependent preferences and liquidity constraints |
| title_fullStr | When expectations become aspirations: reference-dependent preferences and liquidity constraints |
| title_full_unstemmed | When expectations become aspirations: reference-dependent preferences and liquidity constraints |
| title_short | When expectations become aspirations: reference-dependent preferences and liquidity constraints |
| title_sort | when expectations become aspirations reference dependent preferences and liquidity constraints |
| topic | microeconomics losses markets finance |
| url | https://hdl.handle.net/10568/148625 |
| work_keys_str_mv | AT kramerberber whenexpectationsbecomeaspirationsreferencedependentpreferencesandliquidityconstraints |