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Understanding intertemporal choices

  • Enrica Carbone

Previous experimental results show clearly that many subjects do not optimize when solving a life-cycle consumption problem. What do they do? This paper attempts to resolve this question, looking at the discounting, hyperbolic and rolling models as possible explanations. Data from two experiments (one an experiment with a typical subject pool and the second an experiment with subjects from the CentER panel) is used, and the advantage of having experimental data is exploited, which means that one can actually estimate the hyperbolic model. It is shown that the (exponential) discounting model appears to give the best explanation - suggesting that subjects do look ahead (as they should) but increasingly less as time passes (as they should not in the context of these experiments).

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Article provided by Taylor & Francis Journals in its journal Applied Economics.

Volume (Year): 38 (2006)
Issue (Month): 8 ()
Pages: 889-898

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Handle: RePEc:taf:applec:v:38:y:2006:i:8:p:889-898
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References listed on IDEAS
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  1. Kivilcim Metin-Ozcan, 2002. "Determinants of Private Saving Behaviour in Turkey," Working Papers 0206, Department of Economics, Bilkent University.
  2. Hey, John D & Dardanoni, Valentino, 1987. "Optimal Consumption under Uncertainty: An Experimental Investigation," Economic Journal, Royal Economic Society, vol. 98(390), pages 105-16, Supplemen.
  3. Enrica Carbone & John D. Hey, 2004. "The effect of unemployment on consumption: an experimental analysis," Economic Journal, Royal Economic Society, vol. 114(497), pages 660-683, 07.
  4. Christopher Harris & David Laibson, 1999. "Dynamic Choices of Hyperbolic Consumers," Harvard Institute of Economic Research Working Papers 1886, Harvard - Institute of Economic Research.
  5. Kivilcim Metin Ozcan & Asli Gunay & Seda Ertac, 2003. "Determinants of private savings behaviour in Turkey," Applied Economics, Taylor & Francis Journals, vol. 35(12), pages 1405-1416.
  6. Laibson, David, 1998. "Life-cycle consumption and hyperbolic discount functions," European Economic Review, Elsevier, vol. 42(3-5), pages 861-871, May.
  7. Enrica Carbone, 2005. "Demographics and Behaviour," Experimental Economics, Springer, vol. 8(3), pages 217-232, September.
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