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Exponential discounting bias

Listed author(s):
  • Orlando Gomes

    ()

  • Alexandra Ferreira-Lopes

    ()

  • Tiago Sequeira

    ()

We address intertemporal utility maximization under a general discount function that nests the exponential discounting and the quasi-hyperbolic discounting cases as particular specifications. Under the suggested framework, the representative agent adopts, at some initial date, an optimal behavior that shapes her consumption trajectory over time. This agent desires to take a constant discount rate to approach the optimization problem, but bounded rationality, under the form of a present bias, deviates the individual from the intended goal. As a result, decreasing impatience will end up dominating the agent’s behavior. The individual will not be aware of her own time inconsistency and, therefore, she will not revise her plans as time elapses, what makes the problem relatively simple to address from a computational point of view. The general discounting framework is used to approach 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 utility maximization model to the case of habit persistence is also considered. Copyright Springer-Verlag Wien 2014

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File URL: http://hdl.handle.net/10.1007/s00712-013-0363-3
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Article provided by Springer in its journal Journal of Economics.

Volume (Year): 113 (2014)
Issue (Month): 1 (September)
Pages: 31-57

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Handle: RePEc:kap:jeczfn:v:113:y:2014:i:1:p:31-57
DOI: 10.1007/s00712-013-0363-3
Contact details of provider: Web page: http://www.springer.com

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