{"title":"Present Bias and Debt-Financed Durable Goods","authors":"Bar-Gill Bar-Gill, Andrew T Hayashi","doi":"10.1093/aler/ahae005","DOIUrl":null,"url":null,"abstract":"It has become common to view credit as problematic for present-biased consumers, who are tempted to incur too much debt because of its deferred costs. But while this view is generally valid when debt is used to finance current consumption, the picture becomes much more nuanced when credit is used to fund the purchase of durable goods—such as houses, cars, and education—which is the most common use of consumer credit. When bundled with the purchase of a durable good, the deferred cost feature of credit can be a feature, not a bug. The reason is that durable goods provide deferred benefits that are also undervalued by present-biased consumers. Moreover, people often need to save in advance to finance the purchase of a durable good, and present-bias makes it difficult to save. As a result, people with present bias tend to underconsume durable goods. We show that the deferred costs of purchase debt can offset these barriers to buying durable goods and make the present-biased consumer better off both by tempting her to buy something that she should—but would not otherwise—buy and by making it easier to save up for the purchase. (JEL D90, K0, G51)","PeriodicalId":46133,"journal":{"name":"American Law and Economics Review","volume":"5 1","pages":""},"PeriodicalIF":1.0000,"publicationDate":"2024-09-07","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"0","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"American Law and Economics Review","FirstCategoryId":"96","ListUrlMain":"https://doi.org/10.1093/aler/ahae005","RegionNum":3,"RegionCategory":"社会学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"Q3","JCRName":"ECONOMICS","Score":null,"Total":0}
引用次数: 0
Abstract
It has become common to view credit as problematic for present-biased consumers, who are tempted to incur too much debt because of its deferred costs. But while this view is generally valid when debt is used to finance current consumption, the picture becomes much more nuanced when credit is used to fund the purchase of durable goods—such as houses, cars, and education—which is the most common use of consumer credit. When bundled with the purchase of a durable good, the deferred cost feature of credit can be a feature, not a bug. The reason is that durable goods provide deferred benefits that are also undervalued by present-biased consumers. Moreover, people often need to save in advance to finance the purchase of a durable good, and present-bias makes it difficult to save. As a result, people with present bias tend to underconsume durable goods. We show that the deferred costs of purchase debt can offset these barriers to buying durable goods and make the present-biased consumer better off both by tempting her to buy something that she should—but would not otherwise—buy and by making it easier to save up for the purchase. (JEL D90, K0, G51)
期刊介绍:
The rise of the field of law and economics has been extremely rapid over the last 25 years. Among important developments of the 1990s has been the founding of the American Law and Economics Association. The creation and rapid expansion of the ALEA and the creation of parallel associations in Europe, Latin America, and Canada attest to the growing acceptance of the economic perspective on law by judges, practitioners, and policy-makers.