A monotone model of intertemporal choice
Blavatskyy, P.R. (2015) A monotone model of intertemporal choice. Economic Theory, 62 (4). pp. 785-812.
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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).
|Publication Type:||Journal Article|
|Murdoch Affiliation:||School of Management and Governance|
|Copyright:||© 2015 Springer-Verlag Berlin Heidelberg|
|Notes:||Online 2 November 2015|
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