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How innocuous is it to approximate globally decreasing impatience with quasi-hyperbolic discounting?

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  • Calcott, Paul
  • Petkov, Vladimir

Abstract

This paper studies the behavior of a consumer whose time preferences exhibit globally decreasing impatience. We ask how well this behavior could be approximated with quasi-hyperbolic discounting. We find that a quasi-hyperbolic approximation can reproduce the consumer’s equilibrium strategies and their local comparative statics. However, such an approximation would provide biased assessments of measures to mitigate excessive consumption. We identify a range of biases relating to investment in illiquid assets, and to corrective taxes on sin goods. The quantitative implications of these biases are evaluated in numerical examples. For plausible parameter values, the quasi-hyperbolic approximation significantly overstates the effectiveness and the welfare consequences of the responses to excessive consumption.

Suggested Citation

  • Calcott, Paul & Petkov, Vladimir, 2024. "How innocuous is it to approximate globally decreasing impatience with quasi-hyperbolic discounting?," Journal of Mathematical Economics, Elsevier, vol. 111(C).
    • Handle: RePEc:eee:mateco:v:111:y:2024:i:c:s030440682400020x
    DOI: 10.1016/j.jmateco.2024.102958
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