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Welfare implications of naive and sophisticated saving

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  • Ram Fishman

    (Tel Aviv University)

Abstract

Agents with declining discount rates who are unable to commit to their future decisions can either be sophisticated—meaning that they anticipate their future behavior and take it into account in their consumption choices—or naive. Previous studies have shown that sophistication may lead to higher or lower consumption rates, but have not resolved the implications for welfare, arguably the most important question from an economic point of view. Since neither the sophisticated nor the naive solutions are Pareto-efficient, their own welfare ranking is not obvious. This paper shows that the ‘better saver’ amongst the two (lower consumption rate) is always better-off, from all temporal perspectives.

Suggested Citation

  • Ram Fishman, 2020. "Welfare implications of naive and sophisticated saving," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 54(4), pages 623-638, April.
    • Handle: RePEc:spr:sochwe:v:54:y:2020:i:4:d:10.1007_s00355-019-01222-5
    DOI: 10.1007/s00355-019-01222-5
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    References listed on IDEAS

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    Cited by:

    1. Kirill Borissov & Mikhail Pakhnin & Ronald Wendner, 2022. "Kantian Optimization with Quasi-Hyperbolic Discounting," CESifo Working Paper Series 9790, CESifo.

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