Golden Eggs and Hyperbolic Discounting

Abstract

Hyperbolic discount functions induce dynamically inconsistent preferences, implying a motive for consumers to constrain their own future choices. This paper analyzes the decisions of a hyperbolic consumer who has access to an imperfect commitment technology: an illiquid asset whose sale must be initiated one period before the sale proceeds are received. The model predicts that consumption tracks income, and the model explains why consumers have asset-specific marginal propensities to consume. The model suggests that financial innovation may have caused the ongoing decline in U. S. savings rates, since financial innovation increases liquidity, eliminating commitment opportunities. Finally, the model implies that financial market innovation may reduce welfare by providing "too much" liquidity.

Cite this paper

Related papers

1. Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches2008
2. What Do We Know about Capital Structure? Some Evidence from International Data1995
3. Investor Psychology and Security Market Under‐ and Overreactions1998
4. Liquidity Risk and Expected Stock Returns2003
5. Boys will be Boys: Gender, Overconfidence, and Common Stock Investment2001