Utility From Anticipation and Consumption Choices

Abstract

This paper investigates the effects of anticipatory feelings on patience and the resulting intertemporal choices in finite horizon economy. Utility from anticipation of future consumption makes consumers patient. Furthermore, in general, it makes them more/less patient for near future choices than distant future choices, which causes time- inconsistency. To overcome time-inconsistency, sophisticated consumers adjust their discount factors. The resulting optimal consumption path may not be monotonic and it may exhibit hump-shaped or U-shaped. Furthermore, discount factors estimated from the optimal consumption path differ from true time preference and observational equivalence is no longer valid.