Policy effects in hyperbolic vs. exponential models of consumption and retirement

Alan Gustman () and Thomas L. Steinmeier

Journal of Public Economics, 2012, vol. 96, issue 5, 465-473

Abstract: This paper constructs a structural retirement model with hyperbolic preferences and uses it to estimate the effect of several potential Social Security policy changes. Estimated effects of policies are compared using two models, one with hyperbolic preferences and one with standard exponential preferences. Sophisticated hyperbolic discounters may accumulate substantial amounts of wealth for retirement. We find it is frequently difficult to distinguish empirically between models with the two types of preferences on the basis of asset accumulation paths or consumption paths around the period of retirement. Simulations suggest that, despite the much higher initial time preference rate, individuals with hyperbolic preferences may actually value a real annuity more than individuals with exponential preferences who have accumulated roughly equal amounts of assets. This appears to be especially true for individuals with relatively high time preference rates or who have low assets for whatever reason. This affects the tradeoff between current benefits and future benefits on which many of the retirement incentives of the Social Security system rest.

Keywords: Retirement; Saving; Structural models; Hyperbolic discounting; Social security; Pensions (search for similar items in EconPapers)
JEL-codes: C61 D31 D91 E21 H55 J14 J26 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Working Paper: Policy Effects in Hyperbolic vs. Exponential Models of Consumption and Retirement (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:pubeco:v:96:y:2012:i:5:p:465-473

DOI: 10.1016/j.jpubeco.2012.02.001

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