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Golden Eggs and Hyperbolic Discounting

  • Laibson, David I.

Hyperbolic discount functions induce dynamically inconsistent preferences, implying a motive for consumers to constrain their own future choices. This paper analyzes the decisions of a hyperbolic consumer who has access to an imperfect commitment technology: an illiquid asset whose sale must be initiated one period before the sale proceeds are received. The model predicts that consumption tracks income, and the model explains why consumers have asset-specific marginal propensities to consume. The model suggests that financial innovation may have caused the ongoing decline in U. S. savings rates, since financial innovation in- creases liquidity, eliminating commitment opportunities. Finally, the model implies that financial market innovation may reduce welfare by providing “too much†liquidity.

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Paper provided by Harvard University Department of Economics in its series Scholarly Articles with number 4481499.

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Date of creation: 1997
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Publication status: Published in Quarterly Journal of Economics -Cambridge Massachusetts-
Handle: RePEc:hrv:faseco:4481499
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