TITLE:
Reference-Dependent Consumption with Endogenous Labor Supply
AUTHORS:
Lin Zhang
KEYWORDS:
Reference-Dependent Preference, Endogenous Labor Supply, Time Consistency, Self-Control
JOURNAL NAME:
Theoretical Economics Letters,
Vol.5 No.4,
August
5,
2015
ABSTRACT: This paper investigates
time-consistent plans by incorporating the reference-dependent consumption
model with endogenous labor supply. To what extent these plans can help the
consumer overcome the double self-control problems of over-consumption and
late-retirement is discussed. The consumption level and labor supply of the
preferred personal equilibrium solution are compared with those of ex-ante
optimal solution and present-biased solution. For all preferred personal
equilibrium plans, both consumption level and labor supply are lower than those
of the consumer who is present-biased but without reference-dependent
preference. Although the preferred personal equilibrium solutions do not
include the ex-ante optimal level, they help mitigate the welfare loss caused
by present bias.