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The Hyperbolic Consumption Model: Calibration, Simulation, and Empirical Evaluation

The Hyperbolic Consumption Model: Calibration, Simulation, and Empirical Evaluation Abstract Laboratory and field studies of time preference find that discount rates are much greater in the short run than in the long run. Hyperbolic discount functions capture this property. This paper presents simulations of the savings and asset allocation choices of households with hyperbolic preferences. The behavior of the hyperbolic households is compared to the behavior of exponential households. The hyperbolic households borrow much more frequently in the revolving credit market. The hyperbolic households exhibit greater consumption income comovement and experience a greater drop in consumption around retirement. The hyperbolic simulations match observed consumption and balance sheet data much better than the exponential simulations. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Economic Perspectives American Economic Association

The Hyperbolic Consumption Model: Calibration, Simulation, and Empirical Evaluation

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Publisher
American Economic Association
Copyright
Copyright © 2001 by the American Economic Association
Subject
Symposia
ISSN
0895-3309
DOI
10.1257/jep.15.3.47
Publisher site
See Article on Publisher Site

Abstract

Abstract Laboratory and field studies of time preference find that discount rates are much greater in the short run than in the long run. Hyperbolic discount functions capture this property. This paper presents simulations of the savings and asset allocation choices of households with hyperbolic preferences. The behavior of the hyperbolic households is compared to the behavior of exponential households. The hyperbolic households borrow much more frequently in the revolving credit market. The hyperbolic households exhibit greater consumption income comovement and experience a greater drop in consumption around retirement. The hyperbolic simulations match observed consumption and balance sheet data much better than the exponential simulations.

Journal

Journal of Economic PerspectivesAmerican Economic Association

Published: Aug 1, 2001

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