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Reference-Dependent Consumption with Endogenous Labor Supply

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DOI: 10.4236/tel.2015.54059    4,872 Downloads   5,240 Views  
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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.

Conflicts of Interest

The authors declare no conflicts of interest.

Cite this paper

Zhang, L. (2015) Reference-Dependent Consumption with Endogenous Labor Supply. Theoretical Economics Letters, 5, 503-508. doi: 10.4236/tel.2015.54059.

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