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Producción Científica, We analyze an endogenous growth model considering agents with an isoelastic utility. Preferences are characterized by a utility affected by a negative externality, and a level of impatience which decays with the time distance from the present. Agents who cannot commit the actions of their future selves, play a game against them. The stationary equilibrium of this game defines a balanced growth path with a slower growth when played by subsequent central planners than when played by decision makers in the market economy. First, we prove that the fast growing market economy implies higher welfare if the negative externality is small, while the centralized economy is welfare improving above a given threshold for the externality (obtained for a specific family of non-constant discount functions). Secondly, we observe that this threshold increases with the elasticity of intertemporal substitution in consumption. Therefore, the greater this elasticity the more likely it is that the externality lies below this threshold, where policy interventions would not be adequate. Finally, as one would expect, the range of values of the externality for which the market equilibrium provides higher welfare widens the more different from constant discounting time preferences are, due either to a wider range of variation for the instantaneous discount rates or because these decay more slowly., Ministerio de Economía y Competitividad ECO2014-52343-P y Fondos FEDER, Ministerio de Economía y Competitividad ECO2017- 82227-P y Fondos FEDER, Consejería de Educación, Junta de Castilla y León VA024P17 y fondos FEDER, Consejería de Educación, Junta de Castilla y León VA105G18 y fondos FEDER

Most experimental evidence of hyperbolic discounting is based on violations of either stationarity or time consistency. Stationarity is violated when intertemporal choices differ for trade-offs in the near versus the more distant future. Time consistency on the other hand is violated if the optimal allocation for specific dates changes over time. Both types of choice reversals may however also result from time-varying discount rates. Hyperbolic discounting is an unambiguous explanation for choice reversals only if individuals simultaneously violate both stationarity and time consistency. Our field experiment examines the extent to which this is the case. At different points in time, the same participants allocated a future gift over sooner-smaller and later-larger rewards with varying front-end delays. We find that most violations of time consistency do not coincide with violations of stationarity. Random noise in decision-making alone does not explain this finding. Instead, we find a significant association between individual violations and changes in household wealth, in particular for participants with less access to credit. We conclude that in a context of liquidity constraints, eliciting violations of either stationarity or time consistency alone is insufficient to identify hyperbolic discounting.

Available online 4 June 2019 We analyze the determinants of the incentives that a paternalistic social planner should provide to improve the behavior of time-inconsistent consumers. We focus on the specific case in which consumers can reduce their future consumption by exerting self-control effort in non-observable and non-contractible activities. For example, they can reduce their future healthcare costs by practicing physical exercise. Differently from the results obtained by the sin taxes theory, we find that incentives that address the under-exertion of effort by present-biased consumers are always socially costly even when consumers are homogeneous. Moreover, we show that incentives are first increasing and then decreasing in the level of time-inconsistency, due to the ineffectiveness of incentive policies. Incentives are also affected by the degree of naivety in a non-monotonic way. (C) 2019 Elsevier B.V. All rights reserved.

Behavioral development economics applies theories and ideas from psychology and behavioral economics to the study of questions in development economics. We begin by examining a central puzzle in development economics: the existence of high rates of return without correspondingly rapid growth (the “Euler equation puzzle”). We discuss the extent to which present bias and loss aversion can help resolve this puzzle. We next consider various topics in development, including preventive health, savings, insurance, technology adoption, labor markets, and firms. We discuss particular behavioral theories that can help explain some key facts in each literature and describe the existing empirical evidence. Behavioral topics covered include non-standard preferences (present bias, loss aversion, and social preferences), nonstandard beliefs (naivete and non-Bayesian learning) and non-standard decision-making (limited attention and memory, mental accounting, and default effects). We argue that firms in developing countries are more likely to deviate from profit maximization and that studying “behavioral firms” in developing countries is a promising new agenda for research. We also discuss a recent literature arguing that variation in social preferences is an important driver of development, may have deep historical roots, yet may also be responsive to policies. Finally, we describe the emerging literature on the psychology of poverty, which argues that living in poverty itself may causally affect cognitive function, decision-making, and productivity.

Patience—low delay discounting—has been shown to predict cooperative behavior in environments where cooperation conflicts with competitive aspirations. Indeed, impatience seems to be associated to a greater concern for the latter (i.e., for the individual’s relative standing). But what about intergroup-competition situations, where competitive sentiments against outgroups can trigger ingroup cooperation? We analyze the connection between delay discounting and performance in two problem-solving tasks with either individual or intergroup-competition incentives. We find a positive relationship between the mean patience of the members of a group (both when using long-term discounting and short-term discounting, also known as present bias) and the within-group cooperative synergy during intergroup competition. Further exploratory analyses based on a follow-up social preferences task suggest that, for long-term discounting, this result may be explained by patient (vs. impatient) individuals’ propensity to be initially cooperative and to subsequently treat group members based on reciprocal fairness instead of strict equality. For short-term discounting, or present bias, our exploratory analyses do not yield any significant result, meaning that we are unable to provide a social-preferences-based explanation to the higher synergy observed in groups with less present biased individuals.

This paper investigates household decision-making behaviour in the market for energy-efficient lighting and appliances in Delhi, India to study the energy efficiency gap using the inter-disciplinary framework of behavioural economics. A primary dataset of survey responses and choice experiments is analysed to test whether under-investment in energy-efficient technologies is explained by present-biased preferences. A ‘Multiple Price List’ set is employed to compute the standard discount factor, and the present bias and long-run component of a quasi-hyperbolic specification. Individuals who are more patient and less present-biased are found to be more likely to invest in certain energy-efficient appliances. As expected, time preferences are relevant for larger purchases such as refrigerators but lose some or all of their explanatory power for inexpensive purchases such as light bulbs. Our quantitative study contributes to the existing literature, which is limited to qualitatively identifying the (market failure) barriers for energy efficiency; inter alia, it tests for behavioural failures in individuals' decision-making towards the environment.

Choosing a mortgage is one of the most important financial decisions made by a household. Financial innovation has given rise to more complex mortgage products with back-loaded payments, known as ‘Alternative Mortgage Products’ (AMPs), or ‘Interest-Only Mortgages’. Using a specially designed question module in a representative survey of UK mortgage holders, we investigate the effect of consumer financial sophistication on the decision to choose an AMP instead of a standard repayment mortgage. We show poor financial literacy and present bias raise the likelihood of choosing an AMP. Financially literate individuals are also more likely to choose an adjustable rate mortgage, suggesting they avoid paying the term premium of a fixed rate mortgage.

Behavioral economics attempts to integrate insights from psychology, neuroscience, and sociology in order to better predict individual outcomes and develop more effective policy. While the field has been successfully applied to many areas, education has, so far, received less attention — a surprising oversight, given the field's key interest in long-run decision making and the propensity of youth to make poor long-run decisions. In this chapter, we review the emerging literature on the behavioral economics of education. We first develop a general framework for thinking about why youth and their parents might not always take full advantage of education opportunities. We then discuss how these behavioral barriers may be preventing some students from improving their long-run welfare. We evaluate the recent but rapidly growing efforts to develop policies that mitigate these barriers, many of which have been examined in experimental settings. Finally, we discuss future prospects for research in this emerging field.

Why five decades since smoking's harms were first widely publicized do 20% of US adults smoke? Theoretical frameworks to explain smoking come in three forms: rational, imperfectly rational, and irrational addiction. A reason rational people smoke and others do not is preferences differ, for example, smokers attribute less value to being healthy. Persons believing they have low life expectancy or underestimate the probability of adverse consequences may be more likely to smoke. Although theoretical disputes remain, there is some consensus, including: Raising price reduces demand; demand falls with rising educational attainment; smokers earn less; and smoking adversely affects health. Public policies seek to reduce smoking and its negative externalities with limited success.

Schumpeter views founding a family business dynasty as a key reward for entrepreneurship. However, inherited corporate control restricts the talent pool from which the business’s subsequent leaders are drawn, exposing a fundamental time inconsistency in Schumpeter’s thesis – what is good motivation ex ante, results in a higher cost of new entry ex post. Absent explicit mechanisms to inhibit blood successions, family loyalty perseveres in broad swathes of the world, particularly where formal institutions are weak, so groups of firms controlled by members of a family can coordinate strategies where independent firms cannot. Big Push development requires extensive inter-firm coordination, perhaps explaining the importance of large family business groups in emerging markets and economic history. Completed development erodes such advantages, so powerful business families might employ rent-seeking to slow or stop the pace of development to preserve a favorable status quo. Major crises that weaken such entrenched elites appear important to achieving and sustained high-income status and growth by creative destruction.

Problems of intertemporal choice are usually analyzed in terms of a discount function. Moreover, discount functions are usually taken to be either exponential or hyperbolic. This article highlights the assumptions implicit in using a discount function at all, namely, completeness, transitivity, and substitutability. It also describes the additional assumptions implicit in using an exponential discount function, namely, dynamic consistency and stationarity. Since exponential discounting is rejected by the experimental data, dynamic consistency or stationarity or both must be wrong. The article argues that it is dynamic consistency that should be abandoned, at least in its present form. It also explains, by means of an example, how intertemporal choice can be modeled using intrapersonal games when dynamic consistency is abandoned. The experimental data further suggest how actual discount functions differ from exponential discount functions: subjects are more patient with respect to any given delay, the further in the future that delay occurs. The article proposes a method for deriving discount functions with this property and uses the method to derive a unified discount function that incorporates all three of the most popular discount functions (exponential, hyperbolic, and generalized hyperbolic) as special cases. Finally, the article explains the terms discount factor and discount rate, which are commonly used in conjunction with discount functions.

In this paper, we show that delegation of monetary policy to an independent and more conservative central banker is an optimal policy in a multi-country framework with monetary spillovers among countries, even in the absence of time inconsistency (credibility) issues. We also study the welfare implications of delegating monetary policy and extend our analysis to the case of coordination of monetary policies.

Publisher Summary This chapter presents a general overview of the subject of inflation, both in terms of relevant theory and evidence regarding competing hypotheses. During the years that have passed since the preparation of the ambitious survey article, the nature of research in monetary economics has changed considerably—(1) rational expectations has become the mainstream hypothesis concerning expectation behavior, (2) the Ricardian equivalence theorem has become a familiar notion in policy discussions, (3) issues involving overlapping-generations models and cash-in-advance constraints have become common fare, (4) bubble and sunspot phenomena have been extensively investigated, and (5) problems associated with the dynamic inconsistency of policy have been pondered. The chapter describes the development of a simplified but dynamic general equilibrium framework for the analysis of steady-state inflation.

The paper addresses the Kydland and Prescott (1977) critique of the use of optimal control methods for macroeconomic policy design. The critique is that the optimal policy in models with rational expectations are time inconsistent i.e., it becomes suboptimal through the mere passage of time even in the absence of unanticipated shocks. It is argued that time inconsistency undermines the credibility of the optimal policy in the eyes of the private sector who will come to expect the policy-maker to reoptimise. Optimal policy must then be constrained to have the property of time consistency which, for many models, is a serious restriction. In Barro and Gordon (1983) a different approach to the time inconsistency problem is offered. They examine whether reputational consideration can restore credibility for policy-makers and hence avoid the inferior outcome of the time consistency constraint. they assume that policy-makers suffer a loss of reputation if they renege on earlier commitments. With this ‘punishment’ mechanism in place, Barro and Gordon show that policies superior to the time consistent policy exist which can be credible and sustainable. The Barro-Gordon analysis is model specific and in particular applies to static models only. In Currie and Levine (1987) and Levine (1988) a generalisation of their analysis to structurally dynamic, stochastic linear rules is provided. The paper draws on this work together with the linearisation procedure of Christodoulakis et al (1988) to investigate, empirically, the sustainability of optimal policies on the London Business School Model.

Publisher Summary Discretionary monetary policy has long been an anomaly to liberal economists. Henry Simons addressed the issue in his classic paper “Rules versus Authorities in Monetary Policy.” This chapter discusses the gold standard as a quasi-automatic monetary policy regime and alternative monetary rules are also examined. The modern literature centered on the concept of dynamic inconsistency and its relevance to the rules versus discretion debate is discussed in the chapter. A pure gold standard is a fully automatic monetary system. The specie-flow mechanism in which the money stock adjusts through the balance of payments reveals the equilibrating tendencies inherent in the system. With all goods traded and their prices equalized worldwide, adjustment comes purely through wealth effects as the outflow of gold from a country with a current account deficit reduces the flow of spending in that country. The pre-1977 arguments of principle for rules lacked any convincing demonstration that rules might systematically be better than discretion. This demonstration came with the dynamic inconsistency literature.

This paper considers the optimal policy design problem for an econometric model with forward-looking agents. It suggests a new approach to the question of how policymakers should react to new information. This is seen to have implications for the question of whether time-inconsistency is a practically important constraint on the policy design process. It is well established that the fully optimal control strategy in a deterministic environment will be time-inconsistent in the absence of full credibility of policymakers. This optimal strategy will comprise a feedback rule on the state variables of the model plus a feedforward term on future information. Moreover, in the face of additive stochastic errors, the fully optimal strategy will be certainty-equivalent when the problem is linear-quadratic. In practice, however, models are not linear, uncertainty does not conform to these error processes and most importantly, the information set available to policymakers is continually changing. Thus, in the face of evolving expectations about model specification and the future behaviour of exogenous variables, there will always be two separate incentives for policymakers to re-optimise; one on the usual time-inconsistency grounds, the other on the basis of new information. This paper demonstrates how policymakers might implement a policy which assimilates this new information in an optimal manner without reneging or losing credibility in the usual sense. Importantly, this does not require policymakers to announce, ex ante, their future reaction to all possible contingencies nor does it require pre-commitment to a sub-optimal feedback law. The paper concludes, first that previous work on the sustainability of different types of policy rules has been flawed because it has confused these two different incentives to renege, and second that in the face of the typical shocks which do impinge on the economy, the gains to be had from re-optimisation may be dominated by those arising from the reaction to new information, rather than through the exploitation of the time inconsistency property.

Publisher Summary This chapter discusses monetary policy in models with capital. The introduction of optimizing government initially seemed to offer the possibility of similar scientific benefits. The nature of monetary policy with or without commitment, including the possibility of commitment arising endogenously, basically two types of models has been used in the literature. For the evaluation of policies, including both the optimal and the time-consistent ones, it is necessary to be able to determine the competitive equilibrium, given a policy rule that generally is a function of the aggregate state of the economy. Kehoe (1987) showed in a public-finance model with utility-maximizing consumers and benevolent governments that, without commitment versus private agents, the cooperative solution may be inferior for reasons similar to those explaining why the time-consistent solution can be very suboptimal within a given country. In contrast with this type of model of monetary policy-making, models of fiscal policy have been much more explicit in their specification of what decisions people make and what problems they solve. Incentives for capital accumulation are at the heart of time inconsistency. In particular, while most people may accept that view in the context of fiscal policy, it is less common in discussions of monetary policy.

We explore empirically how households insure themselves against consumption volatility. We asked households how they would fund an unexpected emergency consumption expense equivalent to one month’s income. Answers reveal a range of consumption insurance mechanisms, including borrowing from credit markets and social networks. Despite this, more than one fifth of households have no plan to insure their consumption. The likelihood of non-insurance increases with poor financial literacy and is highest among households most at risk of experiencing a financial shock. Among these households we see large effects of poor financial literacy on non-insurance.