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Exponential Discounting Bias

  • 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)

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.

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Paper provided by ISCTE-IUL, Business Research Unit (BRU-IUL) in its series Working Papers Series 2 with number 12-05.

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Date of creation: 15 Jul 2012
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Handle: RePEc:isc:iscwp2:bruwp1205
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