The Implications of Modelling Costly Self-Control for Understanding Wealth Inequality

At this year’s Workshop on Macroeconomic Research at the Krakow University of Economics, Marcin had the pleasure of presenting his work on the role of imperfect self-control in shaping wealth accumulation and wealth inequality. The paper models imperfect self-control through temptation preferences in the sense of Gul and Pesendorfer (2001). It shows that temptation preferences introduce a novel term into the consumption–saving problem that endogenizes the discount factor, implying state-dependent discounting.

Relative to standard frameworks with fixed time preferences, temptation provides a structural and behaviorally grounded explanation for heterogeneity in discount rates and for the positive association between patience and wealth, matching several empirical regularities. The paper also shows that a parsimonious model incorporating imperfect self-control is able to match the observed wealth distribution more closely than a rational benchmark. In addition, temptation preferences shape the distributional effects of taxation.