Saving and Dissaving with Hyperbolic Discounting

63 Pages Posted: 29 Jan 2018

See all articles by Dan Cao

Dan Cao

Georgetown University - Department of Economics

Iván Werning

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: January 2018

Abstract

Is the standard hyperbolic-discounting model capable of robust qualitative predictions for savings behavior? Despite results suggesting a negative answer, we provide a positive one. We give conditions under which all Markov equilibria display either saving at all wealth levels or dissaving at all wealth levels. Moreover, saving versus dissaving is determined by a simple condition comparing the interest rate to a threshold made up of impatience parameters only. Our robustness results illustrate a well-behaved side of the model and imply that qualitative behavior is determinate, dissipating indeterminacy concerns to the contrary (Krusell and Smith, 2003). We prove by construction that equilibria always exist and that multiplicity is present in some cases, highlighting that our robust predictions are not due to uniqueness. Similar results may be obtainable in related dynamic games, such as political economy models of public spending.

Suggested Citation

Cao, Dan and Werning, Ivan, Saving and Dissaving with Hyperbolic Discounting (January 2018). NBER Working Paper No. w24257, Available at SSRN: https://ssrn.com/abstract=3112044

Dan Cao (Contact Author)

Georgetown University - Department of Economics ( email )

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Ivan Werning

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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