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A Non-Unitary Discount Rate Model

  • Koichi Futagami


    (Graduate School of Economics, Osaka University)

  • Takeo Hori


    (Graduate School of Economics, Hitotsubashi University)

The standard economic model of intertemporal decision making assumes that a single discount rate applies equally to discount (dis)utility from all different sources. However, studies such as psychology and behavioral economics have provided evidence that people might discount (dis)utility from different sources at different rates. This paper develops a simple model where the agent discounts utility from consumption at a different rate from disutility of labor supply. We show that in our non-unitary discount rate model, the preferences of the agent are time-inconsistent. The source of the time inconsistency is the difference between relative impatience with consumption and labor supply. It is shown that the policy effects in our model are quite different from those in the standard model. For example, when the agent discounts utility from consumption at a higher rate than the disutility of labor supply, the Friedman rule (the zero nominal interest rate) is no longer optimal. We also make comparisons between our results and those obtained in a model with a time variable discount rate where the preferences are time-inconsistent. It is also shown that the policy effects in our model are quite different from those in a model with a time variable discount rate.

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Paper provided by Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP) in its series Discussion Papers in Economics and Business with number 10-26.

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Length: 46 pages
Date of creation: Oct 2010
Date of revision:
Handle: RePEc:osk:wpaper:1026
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  1. David I. Laibson, 1996. "Hyperbolic Discount Functions, Undersaving, and Savings Policy," NBER Working Papers 5635, National Bureau of Economic Research, Inc.
  2. Peleg, Bezalel & Yaari, Menahem E, 1973. "On the Existence of a Consistent Course of Action when Tastes are Changing," Review of Economic Studies, Wiley Blackwell, vol. 40(3), pages 391-401, July.
  3. Mohammed Abdellaoui & ArthurE. Attema & Han Bleichrodt, 2010. "Intertemporal Tradeoffs for Gains and Losses: An Experimental Measurement of Discounted Utility," Economic Journal, Royal Economic Society, vol. 120(545), pages 845-866, 06.
  4. Goldman, Steven M, 1980. "Consistent Plans," Review of Economic Studies, Wiley Blackwell, vol. 47(3), pages 533-37, April.
  5. Erzo G. J. Luttmer & Thomas Mariotti, 2003. "Subjective Discounting in an Exchange Economy," Journal of Political Economy, University of Chicago Press, vol. 111(5), pages 959-989, October.
  6. David I. Laibson & Andrea Repetto & Jeremy Tobacman, 1998. "Self-Control and Saving for Retirement," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(1), pages 91-196.
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