Hyperbolic Discount Functions, Undersaving, and Savings Policy

51 Pages Posted: 6 Sep 2000 Last revised: 29 Nov 2022

See all articles by David Laibson

David Laibson

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: June 1996

Abstract

Studies of animal and human behavior suggest that discount functions are approximately hyperbolic (Ainslie, 1992). I analyze an economy with complete markets which is populated by hyperbolic consumers. I identify two ways in which this economy can be distinguished from an exponential economy. First, hyperbolic discounting predicts the empirical regularity that the elasticity of intertemporal substitution is less than the inverse of the coefficient of relative risk aversion. Second, hyperbolic discounting explains many features of the policy debate about undersaving. The calibrated hyperbolic economy matches Bernheim's (1994) survey data on self-reported undersaving, and predicts pro-savings government interventions like capital-income subsidies and penalties for early withdrawal from retirement accounts. Hyperbolic consumers are willing to sacrifice 9/10 of a year's worth of income to induce the government to implement optimal revenue-neutral saving incentives.

Suggested Citation

Laibson, David I., Hyperbolic Discount Functions, Undersaving, and Savings Policy (June 1996). NBER Working Paper No. w5635, Available at SSRN: https://ssrn.com/abstract=225557

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