Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/87710
Authors: 
Strulik, Holger
Year of Publication: 
2013
Series/Report no.: 
Discussion Papers, Center for European Governance and Economic Development Research 175
Abstract: 
This paper provides the exact analytical solution for the standard model of endogenous growth when consumers have present-biased preferences and make time-inconsistent savings plans, which they revise continuously. It is shown that long-run growth is not necessarily lower under present-biased preferences. In fact, an equivalence result holds. If hyperbolical discounting provides the same present value of a constant infinite income stream as standard exponential discounting, then the equilibrium rate of economic growth is also the same under both discounting methods. In this sense present-bias and the entailed time-inconsistency of savings plans are harmless for economic growth. The result is robust to the introduction of non-homothetic utility and a variable elasticity of intertemporal substitution in consumption.
Subjects: 
hyperbolic discounting
time-inconsistency
endogenous growth
adjustment dynamics
JEL: 
D91
E21
O40
Document Type: 
Working Paper

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