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Hyperbolical Discounting and Endogenous Growth

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  • Strulik, Holger

Abstract

This paper provides the exact analytical solution for the standard model of endogenous growth when consumers have present-biased preferences and make time-inconsistent savings plans, which they revise continuously. It is shown that long-run growth is not necessarily lower under present-biased preferences. In fact, an equivalence result holds. If hyperbolical discounting provides the same present value of a constant infinite income stream as standard exponential discounting, then the equilibrium rate of economic growth is also the same under both discounting methods. In this sense present-bias and the entailed time-inconsistency of savings plans are harmless for economic growth. The result is robust to the introduction of non-homothetic utility and a variable elasticity of intertemporal substitution in consumption.

Suggested Citation

  • Strulik, Holger, 2014. "Hyperbolical Discounting and Endogenous Growth," VfS Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100560, Verein für Socialpolitik / German Economic Association.
    • Handle: RePEc:zbw:vfsc14:100560
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    Cited by:

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    2. Holger Strulik, 2021. "Hyperbolic discounting and the time‐consistent solution of three canonical environmental problems," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 23(3), pages 462-486, June.
    3. Cabo, Francisco & Martín-Herrán, Guiomar & Martínez-García, María Pilar, 2015. "Non-constant discounting and Ak-type growth models," Economics Letters, Elsevier, vol. 131(C), pages 54-58.
    4. Shinya Tsukahara, 2019. "Present bias and endogenous fiscal deficits: Revisiting Woo (2005)," Economics Bulletin, AccessEcon, vol. 39(3), pages 1666-1676.
    5. Strulik, Holger & Trimborn, Timo, 2018. "Hyperbolic discounting can be good for your health," Journal of Economic Psychology, Elsevier, vol. 69(C), pages 44-57.
    6. Takayuki Ogawa & Hiroaki Ohno, 2024. "Hyperbolic discounting and state‐dependent commitment," Economica, London School of Economics and Political Science, vol. 91(362), pages 414-445, April.
    7. Kang, Minwook & Kim, Eungsik, 2024. "Present bias and endogenous growth," Economics Letters, Elsevier, vol. 236(C).
    8. Strulik, Holger, 2016. "Limited self-control and long-run growth," Mathematical Social Sciences, Elsevier, vol. 83(C), pages 1-8.
    9. Cabo, Francisco & Martín-Herrán, Guiomar & Martínez-García, María Pilar, 2016. "Unbounded growth in the Neoclassical growth model with non-constant discounting," Mathematical Social Sciences, Elsevier, vol. 84(C), pages 93-104.
    10. Cabo, Francisco & Martín-Herrán, Guiomar & Martínez-García, María Pilar, 2020. "Present bias and the inefficiency of the centralized economy: The role of the elasticity of intertemporal substitution," Economic Modelling, Elsevier, vol. 93(C), pages 702-716.
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    12. Johannes Schünemann & Holger Strulik & Timo Trimborn, 2023. "Anticipation of Future Consumption, Excessive Savings, and Long-Run Growth," Economics Working Papers 2023-10, Department of Economics and Business Economics, Aarhus University.

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    JEL classification:

    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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