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Golden Eggs and Hyperbolic Discounting

David Laibson
The Quarterly Journal of Economics
Vol. 112, No. 2, In Memory of Amos Tversky (1937-1996) (May, 1997), pp. 443-477
Published by: Oxford University Press
Stable URL: http://www.jstor.org/stable/2951242
Page Count: 35
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Golden Eggs and Hyperbolic Discounting
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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.

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