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Timeinconsistency and Welfare Program Participation: Evidence from the NLSY. Working Paper
, 2004
"... Abstract We empirically implement a dynamic structural model of labor supply and welfare program participation for agents with potentially timeinconsistent preferences. Using panel data on the choices of single women with children from the NLSY 1979, we provide estimates of the degree of timeinco ..."
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Cited by 65 (1 self)
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Abstract We empirically implement a dynamic structural model of labor supply and welfare program participation for agents with potentially timeinconsistent preferences. Using panel data on the choices of single women with children from the NLSY 1979, we provide estimates of the degree of timeinconsistency, and of its influence on the welfare takeup decision. With these estimates, we conduct counterfactual experiments to quantify the utility loss stemming from the inability to commit to future decisions, and the potential utility gains from commitment mechanisms such as welfare time limits and work requirements.
Equilibrium Welfare and Government Policy with QuasiGeometric Discounting
 Journal of Economic Theory
, 2001
"... We consider a representativeagent equilibrium model where the consumer has quasigeometric discounting and cannot commit to future actions. We restrict attention to a parametric class for preferences and technology and solve for timeconsistent competitive equilibria globally and explicitly. We the ..."
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Cited by 64 (7 self)
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We consider a representativeagent equilibrium model where the consumer has quasigeometric discounting and cannot commit to future actions. We restrict attention to a parametric class for preferences and technology and solve for timeconsistent competitive equilibria globally and explicitly. We then characterize the welfare properties of competitive equilibria and compare them to that of a planning problem. The planner is a consumer representative who, without commitment but in a timeconsistent way, maximizes his presentvalue utility subject to resource constraints. The competitive equilibrium results in strictly higher welfare than does the planning problem whenever the discounting is not geometric. Journal of Economic Literature Classification Numbers: E21, E61, E91.
Subjective Discounting in an Exchange Economy
 Journal of Political Economy
, 2003
"... This paper describes the equilibrium of a discretetime exchange economy in which consumers with arbitrary subjective discount factors and homothetic period utility functions follow linear Markov consumption and portfolio strategies. Explicit expressions are given for state prices and consumptionwe ..."
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Cited by 39 (2 self)
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This paper describes the equilibrium of a discretetime exchange economy in which consumers with arbitrary subjective discount factors and homothetic period utility functions follow linear Markov consumption and portfolio strategies. Explicit expressions are given for state prices and consumptionwealth ratios. We provide an analytically convenient continuoustime approximation and show how subjective rates of time preference affect riskfree rates but not instantaneous riskreturn tradeoffs. Hyperbolic discount factors can be a source of return volatility, but they cannot be used to address asset pricing puzzles related to highfrequency Sharpe ratios. 1.
Time inconsistency preferences and social security
 Proceedings of the North American Meeting of the Econometric Society
, 2002
"... In this paper we examine the role of social security in an economy populated by overlapping generations of individuals with timeinconsistent preferences who face mortality risk, individual income risk, and borrowing constraints. Agents in this economy are heterogeneous with respect to age, employme ..."
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Cited by 34 (0 self)
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In this paper we examine the role of social security in an economy populated by overlapping generations of individuals with timeinconsistent preferences who face mortality risk, individual income risk, and borrowing constraints. Agents in this economy are heterogeneous with respect to age, employment status, retirement status, hours worked, and asset holdings. We consider two cases of timeinconsistent preferences. First, we model agents as quasihyperbolic discounters. They can be sophisticated and play a symmetric Nash game against their future selves; or they can be naive and believe that their future selves will exponentially discount. Second, we consider retrospective time inconsistency. We find that (1) there are substantial welfare costs to quasihyperbolic discounters of their timeinconsistent behavior, (2) social security is a poor substitute for a perfect commitment technology in maintaining oldage consumption, (3) there is little scope for social security in a world of quasihyperbolic discounters (with a shortterm discount rate up to 15%), and, (4) the ex ante annual discount rate must be at least 10 % greater than seems warranted ex post in order for a majority of individuals with retrospective time inconsistency to prefer a social security tax rate of 10 % to no social security. Our findings question the effectiveness of unfunded social security in correcting for the undersaving resulting from timeinconsistent preferences. *An earlier version of this paper, dated June 14, 1999, circulated with the title “Myopia and Social Security. ” We
Exotic Preferences for Macroeconomists
 In NBER Macroeconomics Annual 2004
, 2005
"... We provide a user’s guide to “exotic ” preferences: nonlinear time aggregators, departures from expected utility, preferences over time with known and unknown probabilities, risksensitive and robust control, “hyperbolic ” discounting, and preferences over sets (“temptations”). We apply each to a num ..."
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Cited by 32 (9 self)
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We provide a user’s guide to “exotic ” preferences: nonlinear time aggregators, departures from expected utility, preferences over time with known and unknown probabilities, risksensitive and robust control, “hyperbolic ” discounting, and preferences over sets (“temptations”). We apply each to a number of classic problems in macroeconomics and finance, including consumption and saving, portfolio choice, asset pricing, and Pareto optimal allocations.
N.(2007) “Investment under uncertainty and timeinconsistent preferences
 Journal of Financial Economics
"... The real options framework has been used extensively to analyze the timing of investment under uncertainty. While standard real options models assume that agents possess a constant rate of time preference, there is substantial evidence that agents are very impatient about choices in the shortterm, ..."
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Cited by 24 (4 self)
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The real options framework has been used extensively to analyze the timing of investment under uncertainty. While standard real options models assume that agents possess a constant rate of time preference, there is substantial evidence that agents are very impatient about choices in the shortterm, but are quite patient when choosing between longterm alternatives. We extend the real options framework to model the investment timing decisions of entrepreneurs with such timeinconsistent preferences. Two opposing forces determine investment timing: while evolving uncertainty induces entrepreneurs to defer investment in order to take advantage of the option to wait, their timeinconsistent preferences motivate them to invest earlier in order to avoid the timeinconsistent behavior they will display in the future. We find that the precise tradeoff between these two forces depends on such factors as whether entrepreneurs are sophisticated or naive in their expectations regarding their future timeinconsistent behavior, as well as whether the payoff from investment occurs all at once or over time. We extend the model to consider equilibrium investment behavior for an industry comprised of timeinconsistent entrepreneurs. Such an equilibrium involves the dual problem of entrepreneurs playing dynamic games against competitors as well as against their own future selves.
Nonconstant discounting in continuous time
 Journal of Economic Theory
, 2007
"... This note derives the dynamic programming equation (DPE) to a differentiable Markov Perfect equilibrium in a problem with nonconstant discounting and general functional forms. We begin with a discrete stage model and take the limit as the length of the stage goes to 0 to obtain the DPE correspondin ..."
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Cited by 23 (5 self)
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This note derives the dynamic programming equation (DPE) to a differentiable Markov Perfect equilibrium in a problem with nonconstant discounting and general functional forms. We begin with a discrete stage model and take the limit as the length of the stage goes to 0 to obtain the DPE corresponding to the continuous time problem. We characterize the multiplicity of equilibria under nonconstant discounting and discuss the relation between a given equilibrium of that model and the unique equilibrium of a related problem with constant discounting. We calculate the bounds of the set of candidate steady states and we Pareto rank the equilibria.
Investment and consumption without commitment
, 2008
"... Abstract. In this paper, we investigate the Merton portfolio management problem in the context of nonexponential discounting. This gives rise to timeinconsistency of the decisionmaker. If the decisionmaker at time t = 0 can commit his/her successors, he/she can choose the policy that is optimal ..."
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Cited by 23 (3 self)
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Abstract. In this paper, we investigate the Merton portfolio management problem in the context of nonexponential discounting. This gives rise to timeinconsistency of the decisionmaker. If the decisionmaker at time t = 0 can commit his/her successors, he/she can choose the policy that is optimal from his/her point of view, and constrain the others to abide by it, although they do not see it as optimal for them. If there is no commitment mechanism, one must seek a subgameperfect equilibrium strategy between the successive decisionmakers. In the line of the earlier work by Ekeland and Lazrak [5] we give a precise definition of equilibrium strategies in the context of the portfolio management problem, with finite horizon, we characterize it by a system of partial differential equations, and we show existence in the case when the utility is CRRA and the terminal time T is small. We also investigate the infinitehorizon case and we give two different explicit solutions in the case when the utility is CRRA (in contrast with the case of exponential discount, where there is only one). Some of our results are proved under the assumption that the discount 1 Work supported by PIMS under NSERC grant 29842704. 1 function h(t) is a linear combination of two exponentials, or is the product of an exponential by a linear function. 2
Declining Discount Rates: The Long and the Short of it
, 2005
"... The last few years have witnessed important advances in our understanding of time preference and social discounting. In particular, several rationales for the use of timevarying social discount rates have emerged. These rationales range from the ad hoc to the formal, with some founded solely in ec ..."
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Cited by 21 (0 self)
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The last few years have witnessed important advances in our understanding of time preference and social discounting. In particular, several rationales for the use of timevarying social discount rates have emerged. These rationales range from the ad hoc to the formal, with some founded solely in economic theory while others reflect principles of intergenerational equity. While these advances are to be applauded, the practitioner is left with a confusing array of rationales and the sense that almost any discount rate can be justified. This paper draws together these different strands and provides a critical review of past and present contributions to this literature. In addition to this we highlight some of the problems with employing DDRs in the decisionmaking process, the most pressing of which may be time inconsistency. We clarify their practical implications, and potential pitfalls, of the more credible rationales and argue that some approaches popular in environmental economics literature are illconceived. Finally, we illustrate the impact of different approaches by examining global warming and nuclear power investment. This includes an application and extension of Newell and Pizer [‘Discounting the benefits of climate change mitigation: how much do uncertain rates increase valuations? ’ Journal of Environmental Economics and Management 46 (2003) 52] to UK interest rate data.