IDEAS home Printed from https://ideas.repec.org/p/lsg/lsgwps/wp220.html
   My bibliography  Save this paper

Collective intertemporal choice: time consistency vs. time invariance

Author

Listed:
  • Antony Millner
  • Geoffrey Heal

Abstract

We study collective choice when individuals have heterogeneous discounted utilitarian preferences. Two attractive properties of intertemporal preferences are indistinguishable for individuals, but have dramatically different implications for collective choice. Time Consistency requires a plan that is optimal at one evaluation date to be optimal at all later evaluation dates, while Time Invariance requires preferences to be unchanged under translations of the time axis. We study the implications of these two properties in a tractable dynamic model that captures both common resource and public goods problems. Utilitarian social planners implement the first best if collective preferences are time consistent, but not if they are time invariant. Decentralized alternatives { property rights (for common resources) and voting (for public goods) { can strictly improve on the planning equilibrium if social preferences are time invariant. We reflect on the implications of these fndings for dynamic welfare economics. Revealed preference cannot determine which property we should adopt, but each property is normatively attractive in some contexts.

Suggested Citation

  • Antony Millner & Geoffrey Heal, 2015. "Collective intertemporal choice: time consistency vs. time invariance," GRI Working Papers 220, Grantham Research Institute on Climate Change and the Environment.
  • Handle: RePEc:lsg:lsgwps:wp220
    as

    Download full text from publisher

    File URL: http://www.lse.ac.uk/GranthamInstitute/wp-content/uploads/2015/12/Working-Paper-220-Millner-and-Heal.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Stephen A. Marglin, 1963. "The Social Rate of Discount and The Optimal Rate of Investment," The Quarterly Journal of Economics, Oxford University Press, vol. 77(1), pages 95-111.
    2. Abi Adams & Laurens Cherchye & Bram De Rock & Ewout Verriest, 2014. "Consume Now or Later? Time Inconsistency, Collective Choice, and Revealed Preference," American Economic Review, American Economic Association, vol. 104(12), pages 4147-4183, December.
    3. Krusell, Per & Kuruscu, Burhanettin & Smith, Anthony Jr., 2002. "Equilibrium Welfare and Government Policy with Quasi-geometric Discounting," Journal of Economic Theory, Elsevier, vol. 105(1), pages 42-72, July.
    4. R. H. Strotz, 1955. "Myopia and Inconsistency in Dynamic Utility Maximization," Review of Economic Studies, Oxford University Press, vol. 23(3), pages 165-180.
    5. Moritz A. Drupp & Mark C. Freeman & Ben Groom & Frikk Nesje, 2018. "Discounting Disentangled," American Economic Journal: Economic Policy, American Economic Association, vol. 10(4), pages 109-134, November.
    6. Martin L. Weitzman, 2001. "Gamma Discounting," American Economic Review, American Economic Association, vol. 91(1), pages 260-271, March.
    7. Machina, Mark J, 1989. "Dynamic Consistency and Non-expected Utility Models of Choice under Uncertainty," Journal of Economic Literature, American Economic Association, vol. 27(4), pages 1622-1668, December.
    8. Andrew Caplin & John Leahy, 2004. "The Social Discount Rate," Journal of Political Economy, University of Chicago Press, vol. 112(6), pages 1257-1268, December.
    9. repec:dau:papers:123456789/2326 is not listed on IDEAS
    10. Akerlof, George A, 1991. "Procrastination and Obedience," American Economic Review, American Economic Association, vol. 81(2), pages 1-19, May.
    11. Yvan Lengwiler, 2005. "Heterogeneous Patience and the Term Structure of Real Interest Rates," American Economic Review, American Economic Association, vol. 95(3), pages 890-896, June.
    12. Calvo, Guillermo A & Obstfeld, Maurice, 1988. "Optimal Time-Consistent Fiscal Policy with Finite Lifetimes," Econometrica, Econometric Society, vol. 56(2), pages 411-432, March.
    13. Gollier, Christian, 2016. "Gamma discounters are short-termist," Journal of Public Economics, Elsevier, vol. 142(C), pages 83-90.
    14. Li, Chuan-Zhong & Lofgren, Karl-Gustaf, 2000. "Renewable Resources and Economic Sustainability: A Dynamic Analysis with Heterogeneous Time Preferences," Journal of Environmental Economics and Management, Elsevier, vol. 40(3), pages 236-250, November.
    15. Jaksa Cvitanic & Elyès Jouini & Semyon Malamud & Clotilde Napp, 2011. "Financial Markets Equilibrium with Heterogeneous Agents," Review of Finance, European Finance Association, vol. 16(1), pages 285-321.
    16. Rogoff, Kenneth, 1985. "Can international monetary policy cooperation be counterproductive?," Journal of International Economics, Elsevier, vol. 18(3-4), pages 199-217, May.
    17. repec:dau:papers:123456789/4724 is not listed on IDEAS
    18. E. S. Phelps & R. A. Pollak, 1968. "On Second-Best National Saving and Game-Equilibrium Growth," Review of Economic Studies, Oxford University Press, vol. 35(2), pages 185-199.
    19. Varian, Hal R., 1974. "Equity, envy, and efficiency," Journal of Economic Theory, Elsevier, vol. 9(1), pages 63-91, September.
    20. Maskin, Eric S & Newbery, David M, 1990. "Disadvantageous Oil Tariffs and Dynamic Consistency," American Economic Review, American Economic Association, vol. 80(1), pages 143-156, March.
    21. Matthew O. Jackson & Leeat Yariv, 2015. "Collective Dynamic Choice: The Necessity of Time Inconsistency," American Economic Journal: Microeconomics, American Economic Association, vol. 7(4), pages 150-178, November.
    22. Arrow, K. & Cropper, M. & Gollier, C. & Groom, B. & Heal, G. & Newell, R. & Nordhaus, W. & Pindyck, R. & Pizer, W. & Portney, P. & Sterner, T. & Tol, R. S. J. & Weitzman, Martin L., 2013. "Determining Benefits and Costs for Future Generations," Scholarly Articles 12841963, Harvard University Department of Economics.
    23. Maurizio Mazzocco, 2007. "Household Intertemporal Behaviour: A Collective Characterization and a Test of Commitment," Review of Economic Studies, Oxford University Press, vol. 74(3), pages 857-895.
    24. Partha Dasgupta & Eric Maskin, 2008. "On The Robustness of Majority Rule," Journal of the European Economic Association, MIT Press, vol. 6(5), pages 949-973, September.
    25. Matthew O. Jackson & Leeat Yariv, 2014. "Present Bias and Collective Dynamic Choice in the Lab," American Economic Review, American Economic Association, vol. 104(12), pages 4184-4204, December.
    26. Epstein, Larry G & Zin, Stanley E, 1989. "Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: A Theoretical Framework," Econometrica, Econometric Society, vol. 57(4), pages 937-969, July.
    27. Yoram Halevy, 2015. "Time Consistency: Stationarity and Time Invariance," Econometrica, Econometric Society, vol. 83, pages 335-352, January.
    28. M. Fleurbaey & F. Maniquet, 1997. "Implementability and Horizontal Equity Imply No-Envy," Econometrica, Econometric Society, vol. 65(5), pages 1215-1220, September.
    29. Harl E. Ryder & Geoffrey M. Heal, 1973. "Optimal Growth with Intertemporally Dependent Preferences," Review of Economic Studies, Oxford University Press, vol. 40(1), pages 1-31.
    30. Shane Frederick & George Loewenstein & Ted O'Donoghue, 2002. "Time Discounting and Time Preference: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 40(2), pages 351-401, June.
    31. Dasgupta, Partha, 2001. "Human Well-Being and the Natural Environment," OUP Catalogue, Oxford University Press, number 9780199247882.
    32. Terrence Iverson & Scott Denning & Sammy Zahran, 2015. "When the long run matters," Climatic Change, Springer, vol. 129(1), pages 57-72, March.
    33. Weitzman, Martin L., 1998. "Why the Far-Distant Future Should Be Discounted at Its Lowest Possible Rate," Journal of Environmental Economics and Management, Elsevier, vol. 36(3), pages 201-208, November.
    34. Jouini, Elyès & Marin, Jean-Michel & Napp, Clotilde, 2010. "Discounting and divergence of opinion," Journal of Economic Theory, Elsevier, vol. 145(2), pages 830-859, March.
    35. Becker, Robert A., 1983. "Comparative dynamics in the one-sector optimal growth model," Journal of Economic Dynamics and Control, Elsevier, vol. 6(1), pages 99-107, September.
    36. Robert J. Barro, 1999. "Ramsey Meets Laibson in the Neoclassical Growth Model," The Quarterly Journal of Economics, Oxford University Press, vol. 114(4), pages 1125-1152.
    37. David Laibson, 1997. "Golden Eggs and Hyperbolic Discounting," The Quarterly Journal of Economics, Oxford University Press, vol. 112(2), pages 443-478.
    38. Martin L. Weitzman, 2007. "A Review of the Stern Review on the Economics of Climate Change," Journal of Economic Literature, American Economic Association, vol. 45(3), pages 703-724, September.
    39. Christian Gollier & Richard Zeckhauser, 2005. "Aggregation of Heterogeneous Time Preferences," Journal of Political Economy, University of Chicago Press, vol. 113(4), pages 878-896, August.
    40. Paul A. Samuelson, 1937. "A Note on Measurement of Utility," Review of Economic Studies, Oxford University Press, vol. 4(2), pages 155-161.
    41. Kreps, David M & Porteus, Evan L, 1978. "Temporal Resolution of Uncertainty and Dynamic Choice Theory," Econometrica, Econometric Society, vol. 46(1), pages 185-200, January.
    42. Moritz Drupp & Mark Freeman & Ben Groom & Frikk Nesje, 2015. "Discounting disentangled: an expert survey on the determinants of the long-term social discount rate," GRI Working Papers 196a, Grantham Research Institute on Climate Change and the Environment.
    43. Gordon R. Munro, 1979. "The Optimal Management of Transboundary Renewable Resources," Canadian Journal of Economics, Canadian Economics Association, vol. 12(3), pages 355-376, August.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Antony Millner, 2016. "Heterogeneous intergenerational altruism," GRI Working Papers 226, Grantham Research Institute on Climate Change and the Environment.
    2. Kirill Borissov & Stefano Bosi & Thai Ha-Huy & Leonor Modesto, 2017. "Heterogeneous Human Capital, Inequality and Growth: The Role of Patience and Skills," EUSP Department of Economics Working Paper Series 2017/03, European University at St. Petersburg, Department of Economics.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:lsg:lsgwps:wp220. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (The GRI Administration). General contact details of provider: http://edirc.repec.org/data/grlseuk.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.