Hybrid Exponential‐Hyperbolic Discounting and Growth Without Commitment

30 Pages Posted: 7 Dec 2017

See all articles by Christopher Tsoukis

Christopher Tsoukis

Keele University

Frédéric Tournemaine

University of Nottingham - School of Economics

Max Gillman

Central European University (CEU) - Department of Economics

Date Written: December 2017

Abstract

We analyse the time‐consistent intertemporal behaviour of an individual who discounts the future hyperbolically (HD) in the absence of commitment. In continuous‐time, we extend Barro's (Quarterly Journal of Economics, Vol. 114 (1999), pp. 1125–1152) analysis of a ‘sophisticated’ present‐bias in a deterministic setup and characterize consumption in an analytically tractable way. Furthermore, we embed this analysis into a ‘flexible AK’ model. Greater present bias increases the consumption‐capital ratio, decreases the steady‐state growth rate, while it increases the interest rate‐growth rate wedge. Dynamically, as the interest rate fluctuates over the business cycle, a greater present bias causes the consumption‐output ratio to be more procyclical and volatile, thus helping to resolve the ‘consumption‐output puzzle’. In the transitional dynamics, greater present bias causes a lower steady state capital stock. All of these effects are only present or at least more pronounced under HD than present value‐equivalent exponential discounting.

Suggested Citation

Tsoukis, Christopher and Tournemaine, Frédéric and Gillman, Max, Hybrid Exponential‐Hyperbolic Discounting and Growth Without Commitment (December 2017). The Manchester School, Vol. 85, pp. e45-e74, 2017, Available at SSRN: https://ssrn.com/abstract=3083228 or http://dx.doi.org/10.1111/manc.12197

Christopher Tsoukis (Contact Author)

Keele University

Keele, ST5 5BG
United Kingdom

Frédéric Tournemaine

University of Nottingham - School of Economics ( email )

University Park
Nottingham, NG7 2RD
United Kingdom
+44 (0)115 846 7057 (Phone)
+44 (0)115 951 4159 (Fax)

HOME PAGE: http://www.nottingham.ac.uk/economics/staff/details/f_touremaine.html

Max Gillman

Central European University (CEU) - Department of Economics ( email )

Nador u. 9.
Budapest H-1051
Hungary
+36 1 327 3227 (Phone)
+36 1 327 3232 (Fax)

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