Lifecycle consumption and welfare with nonexponential discounting in continuous time
In this paper, the authors considered the problem of a finite-lived house-hold naive about the fact that its preferences are time-inconsistent. They derived conditions on these preferences under which committing to the plan of the initial self would Pareto dominate the plan realized by the multiplicity of selves acting in sequence. In other words, all of the selves would be better off ex post if they just did what the first self wanted to do. The authors' approach is to characterize the discount function in terms of a ``future weighting factor that measures the deviation of the discounting function from an (arbitrary) exponential discounting function. One of the paper's remarkable results is the finding that the conditions for strict concavity of the log consumption profile and the conditions for the commitment path to Pareto dominate the realized path can be expressed in terms of differences between marginal future weighting factors and weighted averages of these marginal future weighting factors.
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- Lifecycle consumption and welfare with nonexponential discounting in continuous time
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