The Beta-Delta-DELTA Sweet Spot

David Laibson and Peter Maxted

No 30822, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: When solving discrete-time consumption models with present-biased time preferences, backwards induction generates equilibria that are non-robust in the sense that policy functions are often sensitive to parameter choices, including the modeler's choice of the time-step. The current paper identifies a range of "sweet-spot" time-steps that (i) contains the psychologically relevant present bias horizons, and, (ii) generates numerically indistinguishable (i.e., robust) policy functions. This sweet spot includes both a computationally feasible range of discrete-time cases and the limiting continuous-time case (Harris and Laibson, 2013). Accordingly, researchers modeling present bias in buffer stock models can choose either discrete-time cases calibrated to be in the sweet spot or the analytically tractable continuous-time case; these approaches yield essentially identical policy functions.

JEL-codes: C6 D15 D9 D99 E03 E21 E7 G51 (search for similar items in EconPapers)
Date: 2023-01
New Economics Papers: this item is included in nep-dcm
Note: AG EFG ME PE
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