Hyperbolic discounting can be good for your health

Holger Strulik and Timo Trimborn

No 11/2016, ECON WPS - Working Papers in Economic Theory and Policy from TU Wien, Institute of Statistics and Mathematical Methods in Economics, Economics Research Unit

Abstract: It has been argued that hyperbolic discounting of future gains and losses leads to time-inconsistent behavior and thereby, in the context of health economics, not enough investment in health and too much indulgence of unhealthy consumption. Here, we challenge this view. We set up a life-cycle model of human aging and longevity in which individuals discount the future hyperbolically and make time-consistent decisions. This allows us to disentangle the role of discounting from the time consistency issue. We show that hyperbolically discounting individuals, under a reasonable normalization, invest more in their health than they would if they had a constant rate of time preference. Using a calibrated life-cycle model of human aging, we predict that the average U.S. American lives about 4 years longer with hyperbolic discounting than he would if he had applied a constant discount rate. The reason is that, under hyperbolic discounting, experiences in old age receive a relatively high weight in life time utility. In an extension we show that the introduction of health-dependent survival probability motivates an increasing discount rate for the elderly and, in the aggregate, a u-shaped pattern of the discount rate with respect to age.

Keywords: discount rates; present bias; health behavior; aging; longevity (search for similar items in EconPapers)
JEL-codes: D03 D11 D91 I10 I12 (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-age, nep-cbe, nep-dge, nep-hea and nep-upt
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Related works:
Journal Article: Hyperbolic discounting can be good for your health (2018)
Working Paper: Hyperbolic discounting can be good for your health (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:tuweco:112016

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