Quasi-Hyperbolic Discounting and the Existence of Time-Inconsistent Retirement

Theoretical Economics Letters, 3(2), 119-123 (2013)

5 Pages Posted: 9 May 2013 Last revised: 10 May 2013

Abstract

The decision about how much to save for retirement is likely to be dependent on when an individual plans to be retired, and vice versa. Yet, the established literature on hyperbolic discounting and life-cycle saving behavior has for the most part abstracted from choice over retirement. Two notable exceptions are Diamond and Kőszegi (2003) and an important follow-up study by Holmes (2010), which demonstrates that time-inconsistent retirement timing is impossible when saving behavior is explicitly modeled in a stylized three-period setting. In this paper, we build upon the framework of Diamond and Kőszegi (2003) and Holmes (2010) by generalizing the assumptions about initial income and assets. We show analytically and via simple numerical examples that time-inconsistent retirement can exist in a three-period life-cycle model of consumption and saving.

Keywords: Quasi-Hyperbolic Discounting, Retirement, Life-Cycle Consumption/Saving Theory, Time Inconsistency

JEL Classification: D03, D91

Suggested Citation

Findley, T. Scott and Feigenbaum, James A., Quasi-Hyperbolic Discounting and the Existence of Time-Inconsistent Retirement. Theoretical Economics Letters, 3(2), 119-123 (2013), Available at SSRN: https://ssrn.com/abstract=2262536

T. Scott Findley (Contact Author)

Utah State University ( email )

Department of Economics and Finance
3565 Old Main Hill
Logan, UT 84322-3565
United States
+001-435-797-2371 (Phone)

HOME PAGE: http://tscottfindley.com

James A. Feigenbaum

Utah State University ( email )

Logan, UT 84322
United States

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