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Heterogeneous impatience and dynamic inconsistency

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  • Hara, Chiaki

Abstract

It 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.

Suggested Citation

  • Hara, Chiaki, 2012. "Heterogeneous impatience and dynamic inconsistency," CIS Discussion paper series 557, Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University.
    • Handle: RePEc:hit:cisdps:557
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    File URL: https://hermes-ir.lib.hit-u.ac.jp/hermes/ir/re/23084/cis_dp557.pdf
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    References listed on IDEAS

    as
    1. Elyès Jouini & Clotilde Napp, 2007. "Consensus Consumer and Intertemporal Asset Pricing with Heterogeneous Beliefs," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 74(4), pages 1149-1174.
    2. Martin L. Weitzman, 2001. "Gamma Discounting," American Economic Review, American Economic Association, vol. 91(1), pages 260-271, March.
    3. Drazen Prelec, 2004. "Decreasing Impatience: A Criterion for Non‐stationary Time Preference and “Hyperbolic” Discounting," Scandinavian Journal of Economics, Wiley Blackwell, vol. 106(3), pages 511-532, October.
    4. Franke, Günter & Stapleton, Richard C. & Subrahmanyam, Marti G., 1999. "When are Options Overpriced? The Black-Scholes Model and Alternative Characterisations of the Pricing Kernel," CoFE Discussion Papers 99/01, University of Konstanz, Center of Finance and Econometrics (CoFE).
    5. Günter Franke & Richard C. Stapleton & Marti G. Subrahmanyam, 1999. "When are Options Overpriced? The Black—Scholes Model and Alternative Characterisations of the Pricing Kernel," Review of Finance, European Finance Association, vol. 3(1), pages 79-102.
    6. Christian Gollier & Richard Zeckhauser, 2005. "Aggregation of Heterogeneous Time Preferences," Journal of Political Economy, University of Chicago Press, vol. 113(4), pages 878-896, August.
    7. Guenter Franke & Richard C. Stapleton & Marti G. Subrahmanyam, 1999. "When are Options Overpriced? The Black-Scholes Model and Alternative Characterisations of the Pricing Kernel," Finance 9904004, University Library of Munich, Germany.
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    More about this item

    Keywords

    discount factor; discount rate; representative consumer; term structure of interest rates; exponential family;
    All these keywords.

    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 - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • 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

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