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Hyperbolic discounting may be time consistent

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  • Nicolas Drouhin

    ()
    (Ecole normale supérieure de Cachan- Centre d''Economie de la Sorbonne - Paris School of Economics)

Abstract

Using dynamic programming methodology, the paper analyzes the most general conditions for an additive utility functional to represent time consistent preferences. It challenges the conventional wisdom of the domain, which, following Strotz(1956), assume that only exponential discounting is compatible with time consistent behavior. The paper gives some examples of special time consistent hyperbolic discount functions and also discuss the relation between time consistency and stationarity.

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File URL: http://www.accessecon.com/Pubs/EB/2009/Volume29/EB-09-V29-I4-P8.pdf
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Bibliographic Info

Article provided by AccessEcon in its journal Economics Bulletin.

Volume (Year): 29 (2009)
Issue (Month): 4 ()
Pages: 2549-2555

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Handle: RePEc:ebl:ecbull:eb-09-00453

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Related research

Keywords: intertemporal choice; consumption and saving; time consistency; time discounting; exponential discounting; hyperbolic discounting;

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References

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  1. Shane Frederick & George Loewenstein & Ted O'Donoghue, 2002. "Time Discounting and Time Preference: A Critical Review," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 40(2), pages 351-401, June.
  2. Harris, Christopher & Laibson, David, 2001. "Dynamic Choices of Hyperbolic Consumers," Econometrica, Econometric Society, Econometric Society, vol. 69(4), pages 935-57, July.
  3. Thaler, Richard, 1981. "Some empirical evidence on dynamic inconsistency," Economics Letters, Elsevier, Elsevier, vol. 8(3), pages 201-207.
  4. Francois Salanie & Nicolas Treich, 2006. "Over-savings and hyperbolic discounting," Working Papers 15949, Institut National de la Recherche Agronomique, France.
  5. Burness, H Stuart, 1976. "A Note on Consistent Naive Intertemporal Decision Making and an Application to the Case of Uncertain Lifetime," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 43(3), pages 547-49, October.
  6. Laibson, David, 1997. "Golden Eggs and Hyperbolic Discounting," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 112(2), pages 443-77, May.
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Cited by:
  1. Nicolas Drouhin, 2012. "A rank-dependent utility model of uncertain lifetime, time consistency and life insurance," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00748662, HAL.
  2. André Lapied & Olivier Renault, 2012. "An Investigation of Time Consistency for Subjective Discontinued Utility," AMSE Working Papers 1210, Aix-Marseille School of Economics, Marseille, France.
  3. Orlando Gomes & Alexandra Ferreira-Lopes & Tiago Neves Sequeira, 2012. "Exponential Discounting Bias," Working Papers Series 2, ISCTE-IUL, Business Research Unit (BRU-IUL) 12-05, ISCTE-IUL, Business Research Unit (BRU-IUL).
  4. repec:hal:wpaper:halshs-00748662 is not listed on IDEAS
  5. André Lapied & Olivier Renault, 2012. "A subjective discounted utility model," Economics Bulletin, AccessEcon, vol. 32(2), pages 1171-1179.

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