Equivalent representations of non-exponential discounting models

I characterize the entire class of consumption rules for finite-horizon models in which consumption is proportional to lifetime wealth. Any such rule can be obtained from a preference model with CRRA period utility. In a steady state with constant interest rates, a proportional consumption rule can be derived from a model with time-consistent preferences or from a model with possibly time-inconsistent preferences in which a household continually reoptimizes future utility discounted relative to the present instant. These two preference models will only coincide for the special case when the discount function is exponential. More generally, there will be two distinct yet observationally equivalent preference models. Hyperbolic-like discounting may arise because that is a simpler way for the brain to process a standard exponential discount function after accounting for mortality risk.     

Present bias and the inefficiency of the centralized economy: The role of the elasticity of intertemporal substitution

We analyze an endogenous growth model considering agents with an isoelastic utility. Preferences are characterized by a utility affected by a negative externality, and a level of impatience which decays with the time distance from the present. Agents who cannot commit the actions of their future selves, play a game against them. The stationary equilibrium of this game defines a balanced growth path with a slower growth when played by subsequent central planners than when played by decision makers in the market economy. First, we prove that the fast growing market economy implies higher welfare if the negative externality is small, while the centralized economy is welfare improving above a given threshold for the externality (obtained for a specific family of non-constant discount functions). Secondly, we observe that this threshold increases with the elasticity of intertemporal substitution in consumption. Therefore, the greater this elasticity the more likely it is that the externality lies below this threshold, where policy interventions would not be adequate. Finally, as one would expect, the range of values of the externality for which the market equilibrium provides higher welfare widens the more different from constant discounting time preferences are, due either to a wider range of variation for the instantaneous discount rates or because these decay more slowly.     

Impatience and Inconsistency in Intertemporal Choice: An Experimental Analysis

In this article the experiment carried out by Takahashi et al. [2009 Takahashi, T., T. Hadzibeganovic, S. A. Cannas, T. Makino, H. Fukui, and S. Kitayama. “Cultural Neuroeconomics of Intertemporal Choice.” Neuroendocrinology Letters, 30, (2009), pp. 185–191.[PubMed], [Web of Science ®] , [Google Scholar]] is replicated to analyze the influence of culture, gender, origin (urban or rural), and socioeconomic level on the impulsivity and consistency of decision-making processes concerning monetary gains and losses. The results indicate that Spanish students show inconsistency, and more impulsivity over gains (i.e., more impatience, as they discount delayed outcomes more rapidly) than do Japanese and American students. Additionally, participants from urban areas show more impatience over gains than do participants from rural ones, women are more impatient than men are over losses, and participants of different socioeconomic levels show differences in their impulsivity parameters.     

Equilibrium Welfare and Government Policy with Quasi-geometric Discounting

We consider a representative-agent equilibrium model where the consumer has quasi-geometric discounting and cannot commit to future actions. We restrict attention to a parametric class for preferences and technology and solve for time-consistent competitive equilibria globally and explicitly. We then characterize the welfare properties of competitive equilibria and compare them to that of a planning problem. The planner is a consumer representative who, without commitment but in a time-consistent way, maximizes his or her present-value utility subject to resource constraints. The competitive equilibrium results in strictly higher welfare than the planning problem whenever the discounting is not geometric. Journal of Economic Literature Classification Numbers: E21, E61, E91.     

A positive analysis of corporate capital budgeting practices

Although the academic literature has long argued that discounted cash flow methods are superior to other capital budgeting rules, these methods have only fairly recently come into widespread use. This article points out that there are both costs and benefits to using discounting rules such as net present value. Therefore, they may often not work better in practice than nondiscounting methods. Empirically, the use of discounting methods is positively correlated with market interest rates and the dissemination of information about these tools and negatively correlated with the degree of uncertainty in the economy, which is consistent with our hypotheses.     

Is discounting the answer to declining occupancies?

Room rates in United States hotels and lodgings rose rapidly prior to the present recession. Growth has now slowed and demand for rooms has slackened. However rate cutting is not necessarily the answer to the problem of low occupancy, and some industry leaders are concerned that it may prove detrimental to the long term good of the industry. The real test of any pricing policy is whether it will bring new demand to the industry. Operators should base their pricing policies on sound market research and a thorough understanding of the economics of price changes, rather than on intuitive judgements of what the market will bear.     

Saving behavior in stationary equilibrium with random discounting

Summary. We study the implications of random discount rates of future generations for saving behavior and capital holdings in a steady state competitive equilibrium with heterogeneous population. A well-known difficulty in deterministic economies with heterogeneous households is that in steady state only the most patient households hold capital. In this paper we state conditions under which this random discounting is sufficient for households other than the most patient ones to save. We thus provide a simple and natural way of overcoming the aforementioned difficulty. Received: December 28, 1998; revised version: May 19, 1999     

Young adults’ borrowing to purchases of desired consumer products related to present‐biased temporal discounting,attitude towards borrowing and financial involvement and knowledge

The aim is to investigate how present‐biased temporal discounting caused by feelings of financial deficit, attitude towards borrowing and financial involvement and knowledge determine young adults’ likelihood of borrowing to purchases of desired consumer products. A sample of 273 young adults aged 18–30 years answered an online questionnaire including experimental treatments to induce present‐biased temporal discounting, followed by questions about attitude towards borrowing, financial involvement/knowledge and financial resources. In different treatment conditions, participants rated the likelihood of borrowing to purchases of desired consumer products at prices judged to be unaffordable or to replace purchases of equally expensive products in the future but not immediately. In a control condition, participants rated the likelihood of borrowing to an equally expensive, already purchased product to be paid immediately. A higher likelihood of borrowing to purchases of the desired and already purchased unpaid products was observed, but the difference to the needed products was not statistically significant. Likelihood of borrowing was strongly suppressed by a negative attitude, in all between‐group conditions equally influenced by self‐assessed financial resources but unaffected by financial involvement/knowledge. Both financial involvement/knowledge and a negative attitude decreased choices of months of instalment payments with the consequence that the monthly repayment cost increased.