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Welfare Foundations of Discounting

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  • Sáez-Martí, María

    () (The Research Institute of Industrial Economics)

  • Weibull, Jörgen W.

    () (The Research Institute of Industrial Economics)

Abstract

We investigate whether temporal preferences expressed as a sum of discounted consumption utilities can be derived from a welfare representation in the form of a sum of discounted total utilities. We find that a consumption-based representation in the usual exponential form corresponds to one-period "altruism" towards one's future selves: the current self gives positive weight to her total utility in the next period, and weight zero to her total utility in all subsequent periods. We also find that a consumption-based representation in the quasi-exponential (ß,d)-form suggested by Phelps and Pollak (1968) and Laibson (1997) correspond to quasi-exponential altruism towards one's future selves. For ß=1/2, the welfare weights are exponential, while for ß 1/2 in favor of one's future selves. More generally, we establish a functional equation which relates welfare weights to consumption-utility weights. We also postulate five desiderata for consumption-utility weights. None of the usual formalizations satisfy all desiderata, but we propose a simple formalization which does.

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Bibliographic Info

Paper provided by Research Institute of Industrial Economics in its series Working Paper Series with number 572.

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Length: 22 pages
Date of creation: 23 Jan 2002
Date of revision:
Handle: RePEc:hhs:iuiwop:0572

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Keywords: Altruism; Discounting; Dynamic Inconsistency; Time Inconsistency; Welfare ;

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  1. Barro, Robert J., 1974. "Are Government Bonds Net Wealth?," Scholarly Articles 3451399, Harvard University Department of Economics.
  2. George-Marios Angeletos, 2001. "The Hyberbolic Consumption Model: Calibration, Simulation, and Empirical Evaluation," Journal of Economic Perspectives, American Economic Association, vol. 15(3), pages 47-68, Summer.
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