Hyperbolic Discounting, Wealth Accumulation, and Consumption

George-Marios Angeletos (), David Laibson (), Andrea Repetto (), Jeremy Tobacman and Stephen Weinberg

No 90, Documentos de Trabajo from Centro de Economía Aplicada, Universidad de Chile

Abstract: Laboratory and field studies of time preference find that discount rates are much greater in the short-run than in the long-run. Hyperbolic discount functions capture this property. This paper presents simulations of the savings and asset allocation choices of households with hyperbolic preferences. The behavior of the hyperbolic households is com-pared to the behavior of exponential households. The hyperbolic households hold relatively more illiquid wealth and relatively less liquid wealth. The hyperbolic households borrow much more frequently in the revolving credit market. The hyperbolic households exhibit greater consumption-income comovement and experience a greater drop in consumption around retirement. Moreover, the hyperbolic simulations match observed consumption and balance sheet data much better than the exponential simulations.

New Economics Papers: this item is included in nep-ltv
Date: 2000
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