From Anticipations to Present Bias: A Theory of Forward-Looking Preferences

Abstract

How do future well-being and preferences affect the current well-being and preferences of forward-looking agents? Our theory explores this question, producing a new class of tractable models which capture and explain phenomena such as present bias, consumption interdependence, sign effects in discounting, and the desire to space out consumption. Agents manifest impatience toward the current period, but not necessarily toward the earlier of two future periods. The theory characterizes the well-known quasi-hyperbolic discounting model as the unique model of our class which does not display consumption interdependence. Finally, it provides a rigorous approach for analyzing the welfare of agents with time-inconsistent preferences.

Keywords: time inconsistency, forward-looking preferences, hyperbolic discounting, beta-delta discounting, anticipations, welfare criterion

JEL Classification: D01, D60, D90