Hyperbolic discounting may be time consistent

Nicolas Drouhin (1, 2)

1 CES - Centre d'économie de la Sorbonne
2 PSE - Paris School of Economics

Using dynamic programming methodology, the paper analyzes the most general conditions for an additive utility functional to represent time consistent preferences. It challenges the conventional wisdom of the domain, which, following Strotz(1956), assume that only exponential discounting is compatible with time consistent behavior. The paper gives some examples of special time consistent hyperbolic discount functions and also discuss the relation between time consistency and stationarity.

Mots clés: intertemporal choice; consumption and saving; time consistency; time discounting; exponential discounting; hyperbolic discounting

Domaines: Economies et finances

Nicolas Drouhin. Hyperbolic discounting may be time consistent. Economics Bulletin, 2009, 29 (4), pp.2549-2555. ⟨hal-00633177⟩