Quasi-hyperbolic discounting under recursive utility and consumption–investment decisions

Yuki Shigeta

Journal of Economic Theory, 2022, vol. 204, issue C

Abstract: This paper examines an Epstein–Zin recursive utility with quasi-hyperbolic discounting in continuous time. I directly define the utility process supporting the Hamilton–Jacobi–Bellman (HJB) equation in the literature and consider Merton's optimal consumption–investment problem for application. I show that a solution to the HJB equation is the value function. The numerical and mathematical analyses show that unlike in the constant relative risk aversion utility, present bias in the Epstein–Zin utility causes economically significant overconsumption, maintaining a plausible attitude toward risks. Additionally, the sophisticated agent's preproperation occurs if and only if the elasticity of intertemporal substitution is larger than one.

Keywords: Quasi-hyperbolic discounting; Epstein–Zin utility; Consumption–investment problem; Beta-Delta model; Recursive utility (search for similar items in EconPapers)
JEL-codes: D15 G11 G40 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:204:y:2022:i:c:s0022053122001089

DOI: 10.1016/j.jet.2022.105518

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