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Intertemporal Substitution and Hyperbolic Discounting

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  • Geraats, P.M.

Abstract

Evidence from behavioural experiments suggests that intertemporal preferences reflect a hyperbolic discount function. This paper shows that in contrast to exponential discounting, the elasticity of intertemporal substitution for hyperbolic consumers depends on the persistence of the change in the intertemporal relative price. In particular, lasting changes in the real interest rate are likely to generate a smaller degree of intertemporal substitution in consumption than temporary changes. This result holds for both sophisticated and naive hyperbolic consumers. It provides a novel testable implication of hyperbolic discounting and a new perspective on intertemporal substitution.

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File URL: http://www.econ.cam.ac.uk/research/repec/cam/pdf/cwpe0515.pdf
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Bibliographic Info

Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0515.

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Length: 32
Date of creation: Apr 2005
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Handle: RePEc:cam:camdae:0515

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Keywords: Intertemporal substitution; consumption; quasi-hyberbolic discounting;

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  1. Laibson, David, 1998. "Life-cycle consumption and hyperbolic discount functions," European Economic Review, Elsevier, vol. 42(3-5), pages 861-871, May.
  2. Laibson, David I., 1997. "Golden Eggs and Hyperbolic Discounting," Scholarly Articles 4481499, Harvard University Department of Economics.
  3. Casey B. Mulligan, 2002. "Capital, Interest, and Aggregate Intertemporal Substitution," NBER Working Papers 9373, National Bureau of Economic Research, Inc.
  4. Christopher Harris & David Laibson, 2001. "Instantaneous Gratification," Levine's Working Paper Archive 625018000000000267, David K. Levine.
  5. Christopher D. Carroll, 1996. "Buffer-Stock Saving and the Life Cycle/Permanent Income Hypothesis," NBER Working Papers 5788, National Bureau of Economic Research, Inc.
  6. Erzo G. J. Luttmer & Thomas Mariotti, 2003. "Subjective Discounting in an Exchange Economy," Journal of Political Economy, University of Chicago Press, vol. 111(5), pages 959-989, October.
  7. N. Gregory Mankiw & Julio J. Rotemberg & Lawrence H. Summers, 1982. "Intertemporal Substitution in Macroeconomics," NBER Working Papers 0898, National Bureau of Economic Research, Inc.
  8. Orazio P. Attanasio & Guglielmo Weber, 1994. "Is Consumption Growth Consistent with Intertemporal Optimization? Evidence from the Consumer Expenditure Survey," NBER Working Papers 4795, National Bureau of Economic Research, Inc.
  9. Robert J. Barro, 1999. "Ramsey Meets Laibson In The Neoclassical Growth Model," The Quarterly Journal of Economics, MIT Press, vol. 114(4), pages 1125-1152, November.
  10. David I. Laibson, 1996. "Hyperbolic Discount Functions, Undersaving, and Savings Policy," NBER Working Papers 5635, National Bureau of Economic Research, Inc.
  11. Harris, Christopher & Laibson, David, 2001. "Dynamic Choices of Hyperbolic Consumers," Econometrica, Econometric Society, vol. 69(4), pages 935-57, July.
  12. Loewenstein, George & Prelec, Drazen, 1992. "Anomalies in Intertemporal Choice: Evidence and an Interpretation," The Quarterly Journal of Economics, MIT Press, vol. 107(2), pages 573-97, May.
  13. Keller, L Robin & Strazzera, Elisabetta, 2002. " Examining Predictive Accuracy Among Discounting Models," Journal of Risk and Uncertainty, Springer, vol. 24(2), pages 143-60, March.
  14. Uri Benzion & Amnon Rapoport & Joseph Yagil, 1989. "Discount Rates Inferred from Decisions: An Experimental Study," Management Science, INFORMS, vol. 35(3), pages 270-284, March.
  15. Hall, Robert E, 1988. "Intertemporal Substitution in Consumption," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 339-57, April.
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