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Exponential Discounting Bias

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  • Orlando Gomes

    ()
    (ISCAL - Lisbon Polytechnic Institute and BRU-IUL)

  • Alexandra Ferreira-Lopes

    ()
    (ISCTE-IUL, Business School, Department of Economics and BRU-IUL and CEFAGE - UBI)

  • Tiago Neves Sequeira

    ()
    (Universidade da Beira Interior, Management and Economics Department and CEFAGE - UBI)

Abstract

We address intertemporal utility maximization under a general discount function that nests the exponential discounting and the quasi-hyperbolic discounting cases as particular specifi?cations. The suggested framework intends to capture one important anomaly typically found when addressing the way agents discount the future, namely the evidence pointing to the prevalence of decreasing impatience. The referred anomaly can be perceived as a bias relatively to what would be a benchmark exponential discounting setting, and is modeled as such. The general discounting framework is used to address a standard optimal growth model in discrete time. Transitional dynamics and stability properties of the corresponding dynamic setup are studied. An extension of the standard growth model to the case of habit persistence is also considered.

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File URL: http://bru-unide.iscte.pt/RePEc/pdfs/12-05.pdf
File Function: First version, 2012
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Bibliographic Info

Paper provided by ISCTE-IUL, Business Research Unit (BRU-IUL) in its series Working Papers Series 2 with number 12-05.

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Date of creation: 15 Jul 2012
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Handle: RePEc:isc:iscwp2:bruwp1205

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Keywords: Intertemporal Preferences; Exponential Discounting; Quasi-hyperbolic Discounting; Optimal Growth; Habit Persistence; Transitional Dynamics;

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  1. Nicolas Drouhin, 2009. "Hyperbolic discounting may be time consistent," Economics Bulletin, AccessEcon, vol. 29(4), pages 2549-2555.
  2. Gollier, Christian, 2009. "Expected Net Present Value, Expected Net Future Value, and the Ramsey Rule," IDEI Working Papers 557, Institut d'Économie Industrielle (IDEI), Toulouse.
  3. Almenberg, Johan & Gerdes, Christer, 2011. "Exponential Growth Bias and Financial Literacy," IZA Discussion Papers 5814, Institute for the Study of Labor (IZA).
  4. Cameron Hepburn & Stephen Duncan & Antonis Papachristodoulou, 2010. "Behavioural Economics, Hyperbolic Discounting and Environmental Policy," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 46(2), pages 189-206, June.
  5. Coury, Tarek & Dave, Chetan, 2010. ""Hyperbolic" discounting: A recursive formulation and an application to economic growth," Economics Letters, Elsevier, vol. 109(3), pages 193-196, December.
  6. Graham, Liam & Snower, Dennis J., 2008. "Hyperbolic Discounting and the Phillips Curve," IZA Discussion Papers 3477, Institute for the Study of Labor (IZA).
  7. Klaus Walde, 2008. "Applied Intertemporal Optimization," Books, Business School - Economics, University of Glasgow, number econ1, December.
  8. Gong, Liutang & Smith, William & Zou, Heng-fu, 2007. "Consumption and Risk with hyperbolic discounting," Economics Letters, Elsevier, vol. 96(2), pages 153-160, August.
  9. Noor, Jawwad, 2011. "Intertemporal choice and the magnitude effect," Games and Economic Behavior, Elsevier, vol. 72(1), pages 255-270, May.
  10. Annamaria Lusardi, 2008. "Financial Literacy: An Essential Tool for Informed Consumer Choice?," NBER Working Papers 14084, National Bureau of Economic Research, Inc.
  11. Ben Groom & Cameron Hepburn & Phoebe Koundouri & David Pearce, 2005. "Declining Discount Rates: The Long and the Short of it," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 32(4), pages 445-493, December.
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