Retirement and commitments with present-biased preferences

Present-biased preferences induce dynamically inconsistent decisions, implying a motive for people to constrain their future choices. We present a simple model of savings and retirement to show that sophisticated people, who are aware of their bias, use illiquid assets to constrain future consumption and to prevent retiring earlier than planned. Empirical evidence using survey data from Germany confirms the model predictions. We find that naïve present-biased people retire on average 1.7 years earlier than time-consistent, while fully sophisticated people are most likely to hold illiquid assets and retire 1.7 years later than naïve, thereby completely overcoming their bias.