Theoretical Economics 14 (2019), 173–210
A theory of personal budgeting
Prominent research argues that consumers often use personal budgets to manage self-control problems. This paper analyzes the link between budgeting and self-control problems in consumption-saving decisions. It shows that the use of good-specific budgets depends on the combination of a demand for commitment and the demand for flexibility resulting from uncertainty about intratemporal trade-offs between goods. It explains the subtle mechanism which renders budgets useful commitments, their interaction with minimum-savings rules (another widely-studied form of commitment), and how budgeting depends on the intensity of self-control problems. This theory matches several empirical findings on personal budgeting.
Keywords: Budget, minimum-savings rule, commitment, flexibility, intratemporal trade-off, uncertainty, present bias
JEL classification: D23, D82, D86, D91, E62, G31
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