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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| Format: | Artículo preliminar |
| Language: | Inglés |
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International Food Policy Research Institute
2015
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| Online Access: | https://hdl.handle.net/10568/150570 |
| _version_ | 1855522247295369216 |
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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. Liquidity constraints force them to take part of an income loss in early periods, which may induce 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 a second savings motive. This underscores the impact that financial market imperfections can have when applying reference-dependent models in low-income settings. |
| format | Artículo preliminar |
| id | CGSpace150570 |
| institution | CGIAR Consortium |
| language | Inglés |
| publishDate | 2015 |
| publishDateRange | 2015 |
| publishDateSort | 2015 |
| publisher | International Food Policy Research Institute |
| publisherStr | International Food Policy Research Institute |
| record_format | dspace |
| spelling | CGSpace1505702025-11-06T05:55:05Z When expectations become aspirations: Reference-dependent preferences and liquidity constraints Kramer, Berber microeconomics households capital markets assets decision making savings 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. Liquidity constraints force them to take part of an income loss in early periods, which may induce 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 a second savings motive. This underscores the impact that financial market imperfections can have when applying reference-dependent models in low-income settings. 2015-03-26 2024-08-01T02:52:22Z 2024-08-01T02:52:22Z Working Paper https://hdl.handle.net/10568/150570 en https://hdl.handle.net/10568/150122 https://hdl.handle.net/10568/149808 https://hdl.handle.net/10568/153047 Open Access application/pdf International Food Policy Research Institute Kramer, Berber. 2015. When expectations become aspirations: Reference-dependent preferences and liquidity constraints. IFPRI Discussion Paper 1431. Washington, DC: International Food Policy Research Institute. https://hdl.handle.net/10568/150570 |
| spellingShingle | microeconomics households capital markets assets decision making savings 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 households capital markets assets decision making savings finance |
| url | https://hdl.handle.net/10568/150570 |
| work_keys_str_mv | AT kramerberber whenexpectationsbecomeaspirationsreferencedependentpreferencesandliquidityconstraints |