Consistent Intertemporal Decision Making

Abstract

A plan for an intertemporal consumer (or society) is a (constrained optimum) specification of consumption behaviour from the present to the end of his life (or time horizon). If an individual cannot dictate his future behaviour, he may be inconsistent (Strotz [12]); that is, he may, as time passes, revise his specified future behaviour. Among the many unpleasant features of inconsistent planning is that if an individual behaves myopically ( naively , cf. Pollak [10]) by continually executing the present portion of his plan, his behaviour, ex post, makes no sense from any point of view. This paper presents alternative ways of looking at intertemporal behaviour, and examines the conditions under which such behaviour is consistent. In Section III, we show that naive intertemporal optimization is consistent only if intertemporal preferences are structured so that the future is functionally separable from the present. In Section lV, we discuss solutions, which have been suggested, [1], [10] and [12], as a planning strategy when the intertemporal preference ordering does not satisfy the necessary condition for consistent naive planning. We prove an existence and uniqueness theorem for solutions and find the necessary and sufficient conditions for the sophisticated choice functions to be generated by conventional utility maximization.