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Hyperbolic Discount Functions, Undersaving, and Savings Policy

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  • David I. Laibson

Abstract

Studies of animal and human behavior suggest that discount functions are approximately hyperbolic (Ainslie, 1992). I analyze an economy with complete markets which is populated by hyperbolic consumers. I identify two ways in which this economy can be distinguished from an exponential economy. First, hyperbolic discounting predicts the empirical regularity that the elasticity of intertemporal substitution is less than the inverse of the coefficient of relative risk aversion. Second, hyperbolic discounting explains many features of the policy debate about undersaving. The calibrated hyperbolic economy matches Bernheim's (1994) survey data on self-reported undersaving, and predicts pro-savings government interventions like capital-income subsidies and penalties for early withdrawal from retirement accounts. Hyperbolic consumers are willing to sacrifice 9/10 of a year's worth of income to induce the government to implement optimal revenue-neutral saving incentives.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5635.

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Date of creation: Jun 1996
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Publication status: Published as "Life-Cycle Consumption and Hyperbolic Discount Functions", European Economic Review, Vol. 42, nos. 3-5 (May 1998): 861-871.
Handle: RePEc:nbr:nberwo:5635

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  1. Goldman, Steven M, 1980. "Consistent Plans," Review of Economic Studies, Wiley Blackwell, vol. 47(3), pages 533-37, April.
  2. B. Douglas Bernheim & John B. Shoven, 1991. "National Saving and Economic Performance," NBER Books, National Bureau of Economic Research, Inc, number bern91-2.
  3. Mankiw, N.G. & Zeldes, S.P., 1990. "The Consumption Of Stockholders And Non-Stockholders," Weiss Center Working Papers 23-90, Wharton School - Weiss Center for International Financial Research.
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  12. Schelling, Thomas C, 1984. "Self-Command in Practice, in Policy, and in a Theory of Rational Choice," American Economic Review, American Economic Association, vol. 74(2), pages 1-11, May.
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  1. Battle of the Working Groups
    by rauparaha in TVHE on 2011-03-13 22:16:52
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