A monotone model of intertemporal choice

• Published in: Economic theory Vol. 62; no. 4; pp. 785 - 812
• Main Author: Blavatskyy, Pavlo R.
• Format: Journal Article
• Language: English
• Published: Berlin/Heidelberg Springer 01.10.2016; Springer Berlin Heidelberg; Springer Nature B.V
• Subjects: Analysis; Axioms; Consumption; Decision making; Discounting; Disposable income; Economic theory; Economic Theory/Quantitative Economics/Mathematical Methods; Economics; Economics and Finance; Equilibrium (Economics); Expected utility; Functions, Exponential; Game Theory; Interest rates; Marginal utility; Mathematical moments; Microeconomics; Monotonic functions; Preferences; Probability; Public Finance; Research Article; Social and Behav. Sciences; Studies; Utility functions; Utility maximization; Utility models; Weighting functions; Discounted utility; Rank-dependent utility; D01; Expected utility theory; D03; Time preference; D90; D81; Intertemporal choice; Dynamic inconsistency
• ISSN: 0938-2259; 1432-0479
• DOI: 10.1007/s00199-015-0931-6

Existing models of intertemporal choice such as discounted utility (also known as constant or exponential discounting), quasi-hyperbolic discounting and generalized hyperbolic discounting are not monotone: A decision maker with a concave utility function generally prefers receiving $1 m today plus $1 m tomorrow over receiving $2 m today. This paper proposes a new model of intertemporal choice. In this model, a decision maker cannot increase his/her satisfaction when a larger payoff is split into two smaller payoffs, one of which is slightly delayed in time. The model can rationalize several behavioral regularities such as a greater impatience for immediate outcomes. An application of the model to intertemporal consumption/saving reveals that consumers may exhibit dynamic inconsistency. Initially, they commit to saving for future consumption, but, as time passes, they prefer to renegotiate such a contract for an advance payment. Behavioral characterization (axiomatization) of the model is presented. The model allows for intertemporal wealth, complementarity and substitution effects (utility is not separable across time periods).