The Role of Temptation in Explaining Consumption and Investment Choice
نویسنده
چکیده
I simulate a life-cycle model with preferences described by a utility function à la Gul and Pesendorfer (2001). I show that temptation to consume contributes to explain the saving, retirement consumption, and asset allocation puzzles. I perform two analyses, excluding or including Social Security protection, separately for the US and Italy. The pension replacement rate is endogenous in the model and varies with income realizations. The results also show that the optimal behavior differs remarkably between the two countries when Social Security is considered. In particular, the more generous Italian system depresses savings and investments of more tempted individuals. JEL classification codes: D91, E21, G11.
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