Heterogeneous impatience and dynamic inconsistency
AbstractIt has been shown in the literature that if the individual consumers have constant but unequal time discount rates, then the representative consumer has discount rates that is a strictly decreasing function of time, just as is the case of hyperbolic discounting. No contribution, however, has so far established a general relationship between the degree of heterogeneity of individual consumers' subjective discount rates on the one hand and the degree of dynamic inconsistency of the representative consumer's discount rate function on the other. In this paper, we show that the more convex the cumulant generating function of the approximately wealth-weighted distribution of individual consumers' subjective discount rates is, the more dynamically inconsistent the representative consumer is in the sense of Prelec (2004), and vice versa. Applications to the term structure of interest rates are explored and the special case where the distributions of subjective discount rates are taken from an exponential family is investigated.
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Bibliographic InfoPaper provided by Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University in its series CIS Discussion paper series with number 557.
Length: 23 p.
Date of creation: May 2012
Date of revision:
discount factor; discount rate; representative consumer; term structure of interest rates; exponential family;
Find related papers by JEL classification:
- D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
- D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
- D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- D91 - Microeconomics - - Intertemporal Choice - - - Intertemporal Household Choice; Life Cycle Models and Saving
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-06-25 (All new papers)
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