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INCOME SMOOTHING AND SELF‐CONTROL: THE CASE OF SCHOOLTEACHERS
Author(s) -
Mayer Thomas,
Russell Thomas
Publication year - 2005
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1093/ei/cbi060
Subject(s) - economics , utility maximization , discounting , consumption smoothing , payment , econometrics , maximization , control (management) , hyperbolic discounting , time preference , microeconomics , macroeconomics , finance , mathematical economics , management , business cycle
Approximately one‐half of California's Unified School Districts give teachers a choice of receiving their annual salaries in 10 or 12 monthly payments. Intertemporal utility maximization à la Irving Fisher suggests that they should choose 10 payments and earn interest on their savings. But about 50% of the teachers choose 12 installments, even though when summed over a reasonable period the forgone interest can be considerable. This behavior can be explained by the cost of exercising self‐control and by Laibson's model of hyperbolic discounting. A survey of teachers supports this interpretation. (JEL D91 , D12 )