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Hyperbolic discounting in an intergenerational model with altruistic parents

Author

Listed:
  • Jia Cao

    (Renmin University of China)

  • Minghao Li

    (New Mexico State University)

Abstract

Hyperbolic utility discounting has emerged as a leading alternative to exponential discounting because it can explain time-inconsistent behaviors. Intuitively, hyperbolic discounting should play a crucial role in intergenerational models characterized by intertemporal trade-offs. In this paper, we incorporate hyperbolic discounting into a dynamic model in which parents are altruistic towards their children. Agents live for four periods and choose levels of consumption, fertility, investment in their children’s human capital, and bequests to maximize discounted utility. In the steady state, hyperbolic discounting decreases fertility, increases human capital investment, and shifts consumption towards younger ages. These effects are more pronounced in the time-consistent problem (in which agents cannot commit to a course of action) than in the commitment problem, which can be interpreted as realized and intended actions, respectively. The preference-based discrepancy between intended fertility and realized fertility has important implications for the empirical literature that compares the two.

Suggested Citation

  • Jia Cao & Minghao Li, 2022. "Hyperbolic discounting in an intergenerational model with altruistic parents," Journal of Population Economics, Springer;European Society for Population Economics, vol. 35(3), pages 989-1005, July.
    • Handle: RePEc:spr:jopoec:v:35:y:2022:i:3:d:10.1007_s00148-021-00824-7
    DOI: 10.1007/s00148-021-00824-7
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    More about this item

    Keywords

    Hyperbolic discounting; Fertility; Human capital; Intergenerational model;
    All these keywords.

    JEL classification:

    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts
    • I21 - Health, Education, and Welfare - - Education - - - Analysis of Education
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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