Saving and Dissaving with Hyperbolic Discounting

Dan Cao () and Iván Werning

No 24257, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Is the standard hyperbolic-discounting model capable of robust qualitative predictions for savings behavior? Despite results suggesting a negative answer, we provide a positive one. We give conditions under which all Markov equilibria display either saving at all wealth levels or dissaving at all wealth levels. Moreover, saving versus dissaving is determined by a simple condition comparing the interest rate to a threshold made up of impatience parameters only. Our robustness results illustrate a well-behaved side of the model and imply that qualitative behavior is determinate, dissipating indeterminacy concerns to the contrary (Krusell and Smith, 2003). We prove by construction that equilibria always exist and that multiplicity is present in some cases, highlighting that our robust predictions are not due to uniqueness. Similar results may be obtainable in related dynamic games, such as political economy models of public spending.

JEL-codes: D03 D15 D7 E03 E21 (search for similar items in EconPapers)
Date: 2018-01
New Economics Papers: this item is included in nep-cdm, nep-mac and nep-mic
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Citations: View citations in EconPapers (37)

Published as Dan Cao & Iván Werning, 2018. "Saving and Dissaving With Hyperbolic Discounting," Econometrica, Econometric Society, vol. 86(3), pages 805-857, May.

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Working Paper: Saving and Dissaving with Hyperbolic Discounting (2017)
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