Observation equivalence holds in the hyperbolic discounting models such as Laibson (1996), Barro (1999), and Krusell et al (2002). We study a hyperbolic discounting model where the policy function cannot be replicated by a geometric discounting model. Under the logarithmic utility and Cobb-Douglas production, we obtain the explicit solution for consumer's consumption-saving decision. Different from the literatures of exponential discounting, our model shows that the habit persistence affects consumer's consumption-saving decision. Therefore, observational equivalence does not hold in our hyperbolic discounting model.
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Article provided by Economics Bulletin in its journal Economics Bulletin.
Find related papers by JEL classification: E2 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment D1 - Microeconomics - - Household Behavior
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