Abstract
We study consumption behavior, retirement decisions, and endogenous growth within a dynamic equilibrium when individuals have present-biased preferences. Compared to individual with exponential preferences, individual with hyperbolic preferences will choose to retire early for present-biased preferences but to delay retirement for the initial time preference rate. We extend the benchmark equilibrium model to age-dependent survival law and solve numerically the equilibrium effects. It shows that, at the same age, the consumption-capital ratio may have slightly positive effect on increasing life expectancy before retirement but has a significantly positive effect on it after retirement.
Highlights
Most studies in psychology and experimental economics confirm thathyperbolic discounting provides a better answer for future utility than exponential discounting
Retirement decisions, and endogenous growth within a dynamic equilibrium when individuals have present-biased preferences
We extend time-inconsistent consumption problems in the context of endogenous growth and retirement choice following Blanchard-Yarris model
Summary
Most studies in psychology and experimental economics confirm that (quasi-)hyperbolic discounting provides a better answer for future utility than exponential discounting (see e.g., Diamond and Koszegi [1], Zou et al [2], Holmes [3], and Findley and Caliendo [4]). Strulik [6] concludes that present-biased preferences, providing the same present value of a constant infinite income stream, are harmless for economic growth. This raises questions such as (1) how hyperbolic preferences and time-inconsistent behavior do matter in retirement decisions and (2) how the effects of increasing life expectancy is on aggregation consumption to capital ratio before and after retirement. We extend time-inconsistent consumption problems in the context of endogenous growth and retirement choice following Blanchard-Yarris model (as depicted in Blanchard [8], the survival rate is age-independent). In case of aggregation over cohorts, the consumption to capital ratio has slight effect on age-dependent mortality rate before retirement.
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