Does observational equivalence always hold in hyperbolic discounting models?

Liutang Gong and Shenghao Zhu ()

Economics Bulletin, 2006, vol. 5, issue 8, 1-8

Abstract: Observation equivalence holds in the hyperbolic discounting models such as Laibson (1996), Barro (1999), and Krusell et al (2002). We study a hyperbolic discounting model where the policy function cannot be replicated by a geometric discounting model. Under the logarithmic utility and Cobb-Douglas production, we obtain the explicit solution for consumer's consumption-saving decision. Different from the literatures of exponential discounting, our model shows that the habit persistence affects consumer''s consumption-saving decision. Therefore, observational equivalence does not hold in our hyperbolic discounting model.

Keywords: Consumption; function (search for similar items in EconPapers)
JEL-codes: D1 E2 (search for similar items in EconPapers)
Date: 2006-05-17
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Citations: View citations in EconPapers (3)

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