Hyperbolic utility discounting has emerged as a leading alternative to exponential discounting because it can explain time-inconsistent behaviors. A new paper published in the Journal of Population Economics uses hyperbolic discounting in an intergenerational model with altruistic parents to find that in the steady state it decreases fertility, increases human capital investment, and shifts consumption towards younger ages.
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Hyperbolic discounting in an intergenerational model with altruistic parents
by Jia Cao & Minghao Li
Published ONLINE FIRST 2021: Journal of Population Economics FREE READ LINK.
Author Abstract: Hyperbolic utility discounting has emerged as a leading alternative to exponential discounting because it can explain time-inconsistent behaviors. Intuitively, hyperbolic discounting should play a crucial role in intergenerational models characterized by intertemporal trade-offs. In this paper, we incorporate hyperbolic discounting into a dynamic model in which parents are altruistic towards their children. Agents live for four periods and choose levels of consumption, fertility, investment in their children’s human capital, and bequests to maximize discounted utility. In the steady state, hyperbolic discounting decreases fertility, increases human capital investment, and shifts consumption towards younger ages. These effects are more pronounced in the time-consistent problem (in which agents cannot commit to a course of action) than in the commitment problem, which can be interpreted as realized and intended actions, respectively. The preference-based discrepancy between intended fertility and realized fertility has important implications for the empirical literature that compares the two.
Journal of Population Economics
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