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Hyperbolic discounting and endogenous growth

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  • Strulik, Holger

Abstract

This paper provides the closed form solution for the standard model of endogenous growth when consumers have present-biased preferences and make time-inconsistent savings plans, which they revise continuously. It is shown that long-run growth is not necessarily lower under present-biased preferences. In fact, a strong equivalence result holds. If hyperbolic discounting provides the same present value of a constant infinite income stream as standard exponential discounting, then the equilibrium rate of economic growth is also the same under both discounting methods. In this sense present-bias preferences are harmless for economic growth.

Suggested Citation

  • Strulik, Holger, 2015. "Hyperbolic discounting and endogenous growth," Economics Letters, Elsevier, vol. 126(C), pages 131-134.
    • Handle: RePEc:eee:ecolet:v:126:y:2015:i:c:p:131-134
    DOI: 10.1016/j.econlet.2014.11.032
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    Cited by:

    1. Francisco Cabo & Guiomar Martín-Herrán & María Pilar Martínez-García, 2020. "Non-constant Discounting, Social Welfare and Endogenous Growth with Pollution Externalities," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 76(2), pages 369-403, July.
    2. Strulik, Holger & Trimborn, Timo, 2018. "Hyperbolic discounting can be good for your health," Journal of Economic Psychology, Elsevier, vol. 69(C), pages 44-57.
    3. Cabo, Francisco & Martín-Herrán, Guiomar & Martínez-García, María Pilar, 2016. "Unbounded growth in the Neoclassical growth model with non-constant discounting," Mathematical Social Sciences, Elsevier, vol. 84(C), pages 93-104.
    4. Strulik, Holger, 2017. "Hyperbolic discounting and the time-consistent solution of three canonical environmental problems," Center for European, Governance and Economic Development Research Discussion Papers 319, University of Goettingen, Department of Economics.
    5. Cabo, Francisco & Martín-Herrán, Guiomar & Martínez-García, María Pilar, 2020. "Present bias and the inefficiency of the centralized economy: The role of the elasticity of intertemporal substitution," Economic Modelling, Elsevier, vol. 93(C), pages 702-716.
    6. Cabo, Francisco & Martín-Herrán, Guiomar & Martínez-García, María Pilar, 2015. "Non-constant discounting and Ak-type growth models," Economics Letters, Elsevier, vol. 131(C), pages 54-58.
    7. Strulik, Holger, 2016. "Limited self-control and long-run growth," Mathematical Social Sciences, Elsevier, vol. 83(C), pages 1-8.

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    More about this item

    Keywords

    Hyperbolic discounting; Time-inconsistency; Endogenous growth;
    All these keywords.

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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