Saving and retirement behavior under quasi-hyperbolic discounting

Lin Zhang

Journal of Economics, 2013, vol. 109, issue 1, 57-71

Abstract: This paper investigates saving and retirement behavior using a quasi-hyperbolic discounting model with endogenous labor supply. The behavior of quasi-hyperbolic-discounting consumers is compared with optimal behavior, which is obtained under exponential discounting. The quasi-hyperbolic discounters, whether naïve or sophisticated, under-save and retire early compared with an exponential discounter, if and only if the present-biased marginal utility of future consumption decreases with stronger present bias. Logarithmic utility functions and constant-absolute-risk-aversion utility functions can both exhibit this property. In other words, quasi-hyperbolic discounting explains why, consistent with previous empirical studies, under-savers might also be early retirers. Under logarithmic utility, a wage tax and an interest subsidy can counteract the under-saving and early retirement and improve consumer welfare. Copyright Springer-Verlag 2013

Keywords: Saving; Retirement; Quasi-hyperbolic discounting; Sophisticated; Naïve; D91; E21; J26 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:kap:jeczfn:v:109:y:2013:i:1:p:57-71

DOI: 10.1007/s00712-012-0302-8

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