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Incomplete Markets and Hyperbolic Discounting
Author(s) -
Hunter Greg
Publication year - 2003
Publication title -
journal of risk and insurance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.055
H-Index - 63
eISSN - 1539-6975
pISSN - 0022-4367
DOI - 10.1111/1539-6975.00050
Subject(s) - hyperbolic discounting , economics , discounting , valuation (finance) , consumption (sociology) , time preference , econometrics , incomplete markets , mathematical economics , general equilibrium theory , dynamic inconsistency , empirical evidence , function (biology) , microeconomics , evolutionary biology , sociology , biology , social science , finance , philosophy , epistemology
A growing number of empirical researchers are finding evidence of hyperbolic discounting in their investigations on the nature of preferences for distributing consumption over time. This article contributes to the literature by exposing a large class of models in which hyperbolic and exponential discounting are observationally equivalent. The results of the modeling approach simultaneously resolve serious concerns raised by other models in the literature that have been used to explain the empirical findings and answer other questions raised by the phenomenon that are unexplained by earlier contributions. By analyzing an intertemporal general equilibrium model with incomplete insurance markets, this article demonstrates that for sufficiently short time horizons, values implied by a hyperbolic discount function fall within incomplete market valuation bounds.