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Age Dependent Discount Rates, Time Inconsistent Behavior and Welfare Measurement

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Abstract

This paper concerns welfare measurement in a dynamic economy where the instantaneous rate of time preference is age dependent. If agents are naive and do not recognize this age dependency, their savings decisions will be time inconsistent and the purpose of this paper is to analyze how the current value Hamiltonian, which is interpretable as a measure of the comprehensive net national product in utility terms, is related to welfare in this context. The problem is addressed within a standard Ramsey model and the main result is that if the discount rate declines (increases) over time along an optimal path where net investment is positive, then the current value Hamiltonian underestimates (overestimates) a measure of the interest on the present value of future utility.

Suggested Citation

  • Sjögren, Tomas, 2016. "Age Dependent Discount Rates, Time Inconsistent Behavior and Welfare Measurement," Umeå Economic Studies 934, Umeå University, Department of Economics.
  • Handle: RePEc:hhs:umnees:0934
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    More about this item

    Keywords

    welfare measurement; time inconsistency; discounting; dynamic economies;

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D60 - Microeconomics - - Welfare Economics - - - General
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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