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Exploitative Contracting in a Life Cycle Savings Model

Tomasz Sulka

Düsseldorf Institute for Competition Economics (DICE), Heinrich Heine University Düsseldorf, Germany [email protected]

This paper analyses the interaction between a present-biased saver and profit-maximising financial providers. Using a tractable theoretical model, I find that a naïve present-biased agent selects an ‘ineffciently cheap’ (low-yield, low-fee) contract when the income effect of an interest rate change is sufficiently strong, and an ‘inefficiently expensive’ (high-yield, high-fee) contract otherwise. Subsequently, I embed the contract choice in a calibrated life-cycle model. Given the extent of present bias, exploitative contracting reduces the naïve agent's pension wealth by 8%, lowering expected annual consumption in retirement by 3%. The associated loss of consumer welfare corresponds to 0:23% of annual consumption.

DOI

10.1162/rest_a_01540

Pages

1-47

Language

en

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