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A monotone model of intertemporal choice

Pavlo R. Blavatskyy ()
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Pavlo R. Blavatskyy: Murdoch University

Economic Theory, 2016, vol. 62, issue 4, 785-812

Abstract: Abstract Existing models of intertemporal choice such as discounted utility (also known as constant or exponential discounting), quasi-hyperbolic discounting and generalized hyperbolic discounting are not monotone: A decision maker with a concave utility function generally prefers receiving $1 m today plus $1 m tomorrow over receiving $2 m today. This paper proposes a new model of intertemporal choice. In this model, a decision maker cannot increase his/her satisfaction when a larger payoff is split into two smaller payoffs, one of which is slightly delayed in time. The model can rationalize several behavioral regularities such as a greater impatience for immediate outcomes. An application of the model to intertemporal consumption/saving reveals that consumers may exhibit dynamic inconsistency. Initially, they commit to saving for future consumption, but, as time passes, they prefer to renegotiate such a contract for an advance payment. Behavioral characterization (axiomatization) of the model is presented. The model allows for intertemporal wealth, complementarity and substitution effects (utility is not separable across time periods).

Keywords: Intertemporal choice; Discounted utility; Time preference; Dynamic inconsistency; Expected utility theory; Rank-dependent utility (search for similar items in EconPapers)
JEL-codes: D01 D03 D81 D90 (search for similar items in EconPapers)
Date: 2016
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