Temptation and Incentives to Wealth Accumulation

59 Pages Posted: 21 Jun 2021 Last revised: 26 Jan 2022

See all articles by Orazio Attanasio

Orazio Attanasio

Yale University

Agnes Kovacs

University of Manchester

Patrick Moran

University of Copenhagen

Date Written: June 2021

Abstract

We propose a rich model of household behavior to study the effect of two important policies: mortgage interest tax deduction and mandatory mortgage amortization. These policies have attracted some controversy, first because they are conceived to increase overall saving, an objective that the literature does not agree they can achieve, and second because they incentivize illiquid savings and may thus increase the share of ‘wealthy hand-to-mouth’ households. We build a life-cycle model where housing may act as a commitment device to counteract present biases arising from temptation. We show that the model matches several empirical facts, including the large share of wealthy hand-to-mouth households. We evaluate the effect of the two policies and find that they increase wealth accumulation by 7 and 10% respectively. Our results demonstrate that these policies not only induce portfolio re-balancing, as emphasized by the previous literature, but also increase savings by making commitment more accessible.

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Suggested Citation

Attanasio, Orazio and Kovacs, Agnes and Moran, Patrick, Temptation and Incentives to Wealth Accumulation (June 2021). NBER Working Paper No. w28938, Available at SSRN: https://ssrn.com/abstract=3870940

Orazio Attanasio (Contact Author)

Yale University

New Haven, CT 06520
United States

Agnes Kovacs

University of Manchester ( email )

Oxford Road
Manchester, N/A M13 9PL
United Kingdom

Patrick Moran

University of Copenhagen ( email )

Nørregade 10
Copenhagen, København DK-1165
Denmark

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