40 Questions
What is the assumption relaxed in some models to achieve greater descriptive realism?
Constant discounting
The difference in the enumerated and other intertemporal discount rates between a small amount ($10) and a large amount ($1000) was smaller when the two judgments were made in close succession.
False
Who was the first to consider alternatives to exponential discounting in the economics literature?
R.H. Strotz (1955-56)
According to the model by Jon Elster (1979), the per-period discount rate between now and the next period is ______________.
1 −βδ
Match the following models with their characteristics:
DU model = Assumes constant discounting Alternative models = Relax the assumption of constant discounting Model by Jon Elster (1979) = The per-period discount rate between now and the next period is 1 −βδ Other models = Incorporate additional considerations into the instantaneous utility function
The DU model incorporates additional considerations into the instantaneous utility function.
False
What is the utility from anticipation?
The utility from anticipation is an additional consideration incorporated into the instantaneous utility function in some models.
What is the difference in the sign effect between a within-subjects design and a between-subjects design?
Larger in a within-subjects design
What does the term 'time discounting' encompass?
Any reason for caring less about a future consequence
The DU anomalies necessarily violate standard principles that people believe they should uphold.
False
What is the term used to refer to the preference for immediate utility over delayed utility?
Time preference
The DU model was developed by, among others, John Rae, Eugen von Böhm-Bawerk, Irving Fisher, and _______________________.
Paul Samuelson
Match the following economists with their contributions:
John Rae = Early psychological considerations Eugen von Böhm-Bawerk = Historical developments Irving Fisher = DU model limitations Paul Samuelson = Single parameter expression
What is one of the ways alternative theoretical models depart from the DU model?
By including additional arguments in the utility function
The DU model takes into account psychological considerations discussed by early economists.
False
Some alternative theoretical models introduce systematic _______________________ of future utility.
mispredictions
What is the name of the model that assumes the overall value of a sequence of outcomes is equal to the discounted sum of the utilities in each period?
DU model
According to the DU model, people evaluate the results of intertemporal choices independently of any expectations they have regarding consumption in future time periods.
True
What is the name of the concept that states that preferences over consumption profiles are not affected by the nature of consumption in periods in which consumption is identical in the two profiles?
Consumption independence
The DU model explicitly assumes that the overall value of a sequence of outcomes is equal to the (discounted) sum of the utilities in each _________________.
period
Who are some of the researchers who have developed axiom systems for the DU model, in addition to Koopmans?
All of the above
According to the DU model, the utility of an experienced outcome is affected by other outcomes that one might have experienced.
False
Match the following researchers with their contributions to the DU model:
Peter Fishburn = Developed axiom system for DU model K.J. Lancaster = Developed axiom system for DU model Richard F. Meyer = Developed axiom system for DU model Fishburn and Ariel Rubinstein = Developed axiom system for DU model
What is the assumption of the DU model that penalizes utility that is experienced later?
Positive time preference
Who was the first economist to propose the idea of habit formation?
James Duesenberry
Habit formation models assume that high saving rates cause high growth.
False
What is the form of the period-τ instantaneous utility function in habit formation models?
u(cτ; zτ)
The incorporating habit formation into business cycle models can improve their ability to explain movements in _______________________ prices.
asset
Who showed that habit formation might explain the recent finding that high growth rates cause people to save more?
Jeffrey Fuhrer
In habit formation models, the state variable zτ is decreasing in past consumption.
False
Match the following authors with their contributions to habit formation models:
Pollak (1970) = Developed the idea of habit formation Harl Ryder and Geoffrey Heal (1973) = Developed the idea of habit formation Urban Jermann (1998) = Showed that habit formation can improve business cycle models John Campbell and John Cochrane (1999) = Applied habit formation to business cycle models
What is the name of the empirical puzzle that habit formation models can help explain?
Premium puzzle
What is the assumption that motivates a person to spread consumption over time?
Diminishing marginal utility
Derek Parfit's claims about the diminishing psychological connections between our current and future selves are descriptive.
False
Why do people care less about their further future selves?
Because they know that less of what they are now, including their present hopes, plans, loves, or ideals, will survive into the further future.
The assumption of positive time preference is motivated by the idea that the discount rate ρ is ______________.
positive
What is the effect of positive time preference on intertemporal choice?
It motivates people to concentrate consumption in the present
Match the following concepts with their descriptions:
Diminishing marginal utility = The additional utility gained from consuming one more unit of a good or service decreases as the quantity of the good or service consumed increases Positive time preference = The value of present consumption is greater than the value of future consumption Intertemporal choice = The decision to allocate resources between different points in time
The assumption of diminishing marginal utility is more questionable than the assumption of positive time preference.
False
What is the implication of Parfit's argument about the rationality of time discounting?
It provides a reason to count future utility as less than fully 'ours' and to care less about it.
Study Notes
Time Discounting and Intertemporal Choice
- Time discounting is the tendency to care less about a future consequence, including factors that diminish the expected utility generated by a future consequence.
- Time preference refers to the preference for immediate utility over delayed utility.
Historical Origins of the Discounted Utility Model
- The historical developments that led to the formulation of the Discounted Utility (DU) model help explain the model's limitations.
- Major figures in the development of the DU model include John Rae, Eugen von Böhm-Bawerk, Irving Fisher, and Paul Samuelson.
Utility Independence and Time Discounting
- The DU model assumes utility independence, which means that the overall value or "global utility" of a sequence of outcomes is equal to the discounted sum of the utilities in each period.
- The assumption of utility independence creates opposing forces in intertemporal choice: diminishing marginal utility motivates a person to spread consumption over time, while positive time preference motivates a person to concentrate consumption in the present.
Assumptions of the Discounted Utility Model
- The DU model assumes diminishing marginal utility and positive time preference.
- The assumption of diminishing marginal utility seems strongly justified, while the assumption of positive time preference is more questionable.
Alternative Theoretical Models
- Alternative models have been developed to address the limitations of the DU model, including models that relax the assumption of constant discounting, incorporate additional considerations into the instantaneous utility function, and depart from the DU model more radically.
Hyperbolic Discounting
- Hyperbolic discounting models assume that the per-period discount rate between the present and the next period is different from the per-period discount rate between any two future periods.
Habit-Formation Models
- Habit-formation models propose that the utility from current consumption can be affected by the level of past consumption.
- These models assume that the period-τ instantaneous utility function takes the form u(cτ; cτ − 1, cτ − 2,...) where ∂2u ⁄ ∂cτ ∂cτ ′ > 0 for τ′ < τ.
- Habit formation may help explain empirical puzzles in macroeconomics, such as the relationship between saving rates and growth rates.
This quiz covers the concepts of time discounting and intertemporal choice, including the discounted utility model and its historical origins. Learn about the factors that influence our preferences for immediate versus delayed utility.
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