Can Temptation Explain Housing Choices over the Life Cycle?

We use individual life-history data from twelve European countries, and duration analysis that controls for unobserved heterogeneity, to investigate whether observed patterns of investment in illiquid assets and housing are consistent with predictions based on “temptation preferences”. A motivating model takes into account the standard motives for saving, but also recognizes that illiquid financial assets and housing may be used by individuals who find it hard to control the temptation linked to abundant cash on hand. Even controlling for many possible motives for purchasing housing, and for unobserved heterogeneity, a large fraction of individuals become significantly more likely to buy housing after investing in illiquid assets; this finding is consistent with the predictions of the model.