Journal article
A monotone model of intertemporal choice
Economic Theory, Vol.62(4), pp.785-812
2016
Abstract
Existing models of intertemporal choice such as discounted utility (also known as constant or exponential discounting), quasi-hyperbolic discounting and generalized hyperbolic discounting are not monotone: A decision maker with a concave utility function generally prefers receiving $1 m today plus $1 m tomorrow over receiving $2 m today. This paper proposes a new model of intertemporal choice. In this model, a decision maker cannot increase his/her satisfaction when a larger payoff is split into two smaller payoffs, one of which is slightly delayed in time. The model can rationalize several behavioral regularities such as a greater impatience for immediate outcomes. An application of the model to intertemporal consumption/saving reveals that consumers may exhibit dynamic inconsistency. Initially, they commit to saving for future consumption, but, as time passes, they prefer to renegotiate such a contract for an advance payment. Behavioral characterization (axiomatization) of the model is presented. The model allows for intertemporal wealth, complementarity and substitution effects (utility is not separable across time periods).
Details
- Title
- A monotone model of intertemporal choice
- Authors/Creators
- P.R. Blavatskyy (Author/Creator) - Murdoch University
- Publication Details
- Economic Theory, Vol.62(4), pp.785-812
- Publisher
- Springer
- Identifiers
- 991005540408307891
- Copyright
- © 2015 Springer-Verlag Berlin Heidelberg
- Murdoch Affiliation
- School of Management and Governance
- Language
- English
- Resource Type
- Journal article
- Note
- Online 2 November 2015
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- Citation topics
- 6 Social Sciences
- 6.122 Economic Theory
- 6.122.1287 Risk Preferences
- Web Of Science research areas
- Economics
- ESI research areas
- Economics & Business