Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/148941
Authors: 
Strulik, Holger
Trimborn, Timo
Year of Publication: 
2016
Series/Report no.: 
ECON WPS - Vienna University of Technology Working Papers in Economic Theory and Policy 11/2016
Abstract: 
It has been argued that hyperbolic discounting of future gains and losses leads to time-inconsistent behavior and thereby, in the context of health economics, not enough investment in health and too much indulgence of unhealthy consumption. Here, we challenge this view. We set up a life-cycle model of human aging and longevity in which individuals discount the future hyperbolically and make time-consistent decisions. This allows us to disentangle the role of discounting from the time consistency issue. We show that hyperbolically discounting individuals, under a reasonable normalization, invest more in their health than they would if they had a constant rate of time preference. Using a calibrated life-cycle model of human aging, we predict that the average U.S. American lives about 4 years longer with hyperbolic discounting than he would if he had applied a constant discount rate. The reason is that, under hyperbolic discounting, experiences in old age receive a relatively high weight in life time utility. In an extension we show that the introduction of health-dependent survival probability motivates an increasing discount rate for the elderly and, in the aggregate, a u-shaped pattern of the discount rate with respect to age.
Subjects: 
discount rates
present bias
health behavior
aging
longevity
JEL: 
D03
D11
D91
I10
I12
Document Type: 
Working Paper

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