The Logical Consistency of Time Inconsistency: A Theory of Forward-Looking Behavior

Simone Galperti and Bruno Strulovici

Discussion Papers from Northwestern University, Center for Mathematical Studies in Economics and Management Science

Abstract: This paper argues that, to be forward-looking in a logically consistent sense, a decision maker must take account of his overall well-being, not just his instantaneous utility, in all future periods. However, such a decision-maker is necessarily time inconsistent. The paper explores the relationship between how a decision-maker discounts well-being and how he discounts instantaneous utility. It also provides simple axiomatizations of preferences that exhibit forward-looking behavior, including quasi-hyperbolic discounting (Phelps and Pollack (1968) [18]; Laibson (1997) [12]). Finally, the paper provides a rigorous way to think about welfare criteria in models with time inconsistent agents.

Keywords: time inconsistency; forward-looking behavior; hyperbolic discounting; beta-delta discounting; anticipations; welfare criterion. JEL Classification: D01; D60; D90 (search for similar items in EconPapers)
Date: 2013-10-29
New Economics Papers: this item is included in nep-mic
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