Exponential discounting bias

Orlando Gomes, Alexandra Lopes () and Tiago Sequeira

Journal of Economics, 2014, vol. 113, issue 1, 57 pages

Abstract: We address intertemporal utility maximization under a general discount function that nests the exponential discounting and the quasi-hyperbolic discounting cases as particular specifications. Under the suggested framework, the representative agent adopts, at some initial date, an optimal behavior that shapes her consumption trajectory over time. This agent desires to take a constant discount rate to approach the optimization problem, but bounded rationality, under the form of a present bias, deviates the individual from the intended goal. As a result, decreasing impatience will end up dominating the agent’s behavior. The individual will not be aware of her own time inconsistency and, therefore, she will not revise her plans as time elapses, what makes the problem relatively simple to address from a computational point of view. The general discounting framework is used to approach a standard optimal growth model in discrete time. Transitional dynamics and stability properties of the corresponding dynamic setup are studied. An extension of the standard utility maximization model to the case of habit persistence is also considered. Copyright Springer-Verlag Wien 2014

Keywords: Intertemporal preferences; Exponential discounting; Quasi-hyperbolic discounting; Optimal growth; Habit persistence; Transitional dynamics; C61; D91; O41 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://hdl.handle.net/10.1007/s00712-013-0363-3 (text/html)
Access to full text is restricted to subscribers.

Related works:
Working Paper: Exponential Discounting Bias (2012)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:jeczfn:v:113:y:2014:i:1:p:31-57

DOI: 10.1007/s00712-013-0363-3

Access Statistics for this article

Journal of Economics is currently edited by Giacomo Corneo

More articles in Journal of Economics from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().