Intertemporal Substitution and Hyperbolic Discounting
Geraats, Petra M.
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Geraats, P. M. (2006). Intertemporal Substitution and Hyperbolic Discounting. http://www.dspace.cam.ac.uk/handle/1810/131622
Evidence from behavioural experiments suggests that intertemporal preferences reflect a hyperbolic discount function. This paper shows that in contrast to exponential discounting, the elasticity of intertemporal substitution for hyperbolic consumers depends on the persistence of the change in the intertemporal relative price. In particular, lasting changes in the real interest rate are likely to generate a smaller degree of intertemporal substitution in consumption than temporary changes. This result holds for both sophisticated and naive hyperbolic consumers. It provides a novel testable implication of hyperbolic discounting and a new perspective on intertemporal substitution.
Classification-JEL: D91, E21, Intertemporal substitution, consumption, quasi-hyberbolic discounting
This record's URL: http://www.dspace.cam.ac.uk/handle/1810/131622