Households time-inconsistent despite individual preferences
A new working paper from the Federal Reserve Bank of Philadelphia presents a model showing that multi-person households are time-inconsistent in consumption and savings, even if individual members have standard time preferences. This arises from a dynamic commons problem within the household.
Shared wealth, shared overconsumption
The paper introduces a model of a multi-person household where members are imperfectly altruistic, derive utility from private and shared public goods, and share wealth.
Despite individual members having standard exponential time preferences and agreeing on an optimal consumption and savings plan, the household exhibits time-inconsistency.
This occurs because members systematically overconsume private goods and undersave relative to the optimal plan.
The central insight is that shared savings within a multi-person household are subject to a dynamic commons problem, leading to under-provision in equilibrium.
The cost of this time-inconsistency increases monotonically with the degree of self-interest among members.
Separate accounts, persistent inconsistency
The study examines household behavior when members save in separate, inaccessible accounts.
Even then, time-inconsistency persists due to altruism and shared public goods.
Anticipating future voluntary transfers or joint contributions creates the same dynamic commons problem as shared wealth.
An additional dollar of personal saving today might offset a future contribution or lower future transfers from another member.
This suggests time-inconsistency can apply to extended families with separate wealth but potential future transfers.
The paper also explores conditions for choosing separate versus joint accounts, finding joint accounts are adopted when risk pooling benefits outweigh overconsumption costs, particularly with large exposure to relative wealth shocks.
Beyond the unitary model
This paper fundamentally challenges the unitary model of household decision-making.
It reveals how intra-household dynamics drive time-inconsistency, even with rational individuals.
The study provides a crucial rationale for commitment technologies, like joint approval for retirement withdrawals, that enforce shared financial discipline.