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Hyperbolic discounting in an intergenerational model with altruistic parents

Jia Cao () and Minghao Li ()
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Jia Cao: Renmin University of China
Minghao Li: New Mexico State University

Journal of Population Economics, 2022, vol. 35, issue 3, No 6, 989-1005

Abstract: Abstract Hyperbolic utility discounting has emerged as a leading alternative to exponential discounting because it can explain time-inconsistent behaviors. Intuitively, hyperbolic discounting should play a crucial role in intergenerational models characterized by intertemporal trade-offs. In this paper, we incorporate hyperbolic discounting into a dynamic model in which parents are altruistic towards their children. Agents live for four periods and choose levels of consumption, fertility, investment in their children’s human capital, and bequests to maximize discounted utility. In the steady state, hyperbolic discounting decreases fertility, increases human capital investment, and shifts consumption towards younger ages. These effects are more pronounced in the time-consistent problem (in which agents cannot commit to a course of action) than in the commitment problem, which can be interpreted as realized and intended actions, respectively. The preference-based discrepancy between intended fertility and realized fertility has important implications for the empirical literature that compares the two.

Keywords: Hyperbolic discounting; Fertility; Human capital; Intergenerational model (search for similar items in EconPapers)
JEL-codes: C61 D14 I21 J11 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/s00148-021-00824-7

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