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Exponential Discounting Bias

Author

Listed:
  • Orlando Gomes

    () (ISCAL - Lisbon Polytechnic Institute and BRU-IUL)

  • Alexandra Ferreira-Lopes

    () (ISCTE-IUL, Business School, Department of Economics and BRU-IUL and CEFAGE - UBI)

  • Tiago Neves Sequeira

    () (Universidade da Beira Interior, Management and Economics Department and CEFAGE - UBI)

Abstract

We address intertemporal utility maximization under a general discount function that nests the exponential discounting and the quasi-hyperbolic discounting cases as particular specifi?cations. The suggested framework intends to capture one important anomaly typically found when addressing the way agents discount the future, namely the evidence pointing to the prevalence of decreasing impatience. The referred anomaly can be perceived as a bias relatively to what would be a benchmark exponential discounting setting, and is modeled as such. The general discounting framework is used to address 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 growth model to the case of habit persistence is also considered.

Suggested Citation

  • Orlando Gomes & Alexandra Ferreira-Lopes & Tiago Neves Sequeira, 2012. "Exponential Discounting Bias," Working Papers Series 2 12-05, ISCTE-IUL, Business Research Unit (BRU-IUL).
  • Handle: RePEc:isc:iscwp2:bruwp1205
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Intertemporal Preferences; Exponential Discounting; Quasi-hyperbolic Discounting; Optimal Growth; Habit Persistence; Transitional Dynamics;

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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