A Non-Unitary Discount Rate Model
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.
|Date of creation:||Oct 2010|
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