Laibson (1997) analyzes hyperbolic discounting, where individuals prefer immediate rewards over future ones, leading to dynamically inconsistent preferences. He models a consumer with access to an illiquid asset that can only be sold after a delay, creating a commitment mechanism. The model predicts that consumption tracks income and explains asset-specific marginal propensities to consume. It also suggests that financial innovation, by increasing liquidity, reduces savings rates and may lower welfare by providing "too much" liquidity. The paper discusses how hyperbolic discounting leads to self-control issues, with individuals often failing to follow through on future commitments. It shows that consumption is constrained by liquidity, and that financial innovation can eliminate commitment opportunities, reducing capital accumulation. The model explains why Ricardian equivalence does not hold and why savings rates have declined in the U.S. It also highlights that financial market innovation may reduce welfare by increasing liquidity beyond what is optimal. The model's implications include the comovement of consumption and income, asset-specific marginal propensities to consume, and the violation of Ricardian equivalence. It also explains the decline in U.S. savings rates due to increased access to credit, which reduces the effectiveness of commitment devices. The paper concludes that financial innovation can lower welfare by providing excessive liquidity, and that the introduction of instantaneous credit may reduce capital accumulation and consumer welfare.Laibson (1997) analyzes hyperbolic discounting, where individuals prefer immediate rewards over future ones, leading to dynamically inconsistent preferences. He models a consumer with access to an illiquid asset that can only be sold after a delay, creating a commitment mechanism. The model predicts that consumption tracks income and explains asset-specific marginal propensities to consume. It also suggests that financial innovation, by increasing liquidity, reduces savings rates and may lower welfare by providing "too much" liquidity. The paper discusses how hyperbolic discounting leads to self-control issues, with individuals often failing to follow through on future commitments. It shows that consumption is constrained by liquidity, and that financial innovation can eliminate commitment opportunities, reducing capital accumulation. The model explains why Ricardian equivalence does not hold and why savings rates have declined in the U.S. It also highlights that financial market innovation may reduce welfare by increasing liquidity beyond what is optimal. The model's implications include the comovement of consumption and income, asset-specific marginal propensities to consume, and the violation of Ricardian equivalence. It also explains the decline in U.S. savings rates due to increased access to credit, which reduces the effectiveness of commitment devices. The paper concludes that financial innovation can lower welfare by providing excessive liquidity, and that the introduction of instantaneous credit may reduce capital accumulation and consumer welfare.