Intertemporal Consumption Research Articles

Dynamic self‐control preferences and the behavior of the saving rate

AbstractWe characterize the dynamics of the saving rate in an exogenous growth model where consumers exhibit present‐biased preferences. Based on empirical evidence, we assume that consumers are subject to temptation and exhibit a preference for costly self‐control. Moreover, we propose the intensity of these phenomena to depend on aggregate wealth. We show that in economies where consumers are present‐biased, the saving rate follows a hump‐shaped pattern after an exogenous destruction of the capital stock. The present‐bias effect on the intertemporal consumption choice counteracts the standard effect from decreasing returns to capital. After a large destruction of capital, the temptation effect can dominate in the first periods of the adjustment process. By calibrating the model, we obtain a very good fit between our simulations and data concerning the saving rate, the growth rate, and the speed of convergence from the European recovery after World War II.

(In)Stability of the Relationship between Relative Expenditure and Price of Durable and Nondurable Goods

AbstractUsing an intertemporal consumption model with nondurable and durable goods, we identify a break in the long‐run equilibrium relationship between their relative expenditure and relative prices. From 1959 to 1981, these goods were gross substitutes with an elasticity greater than one. Post‐1981, the estimated elasticity is below one, indicating complementarity. This shift altered short‐run dynamics with durable goods still driving error correction but the magnitude of adjustment is smaller. The cyclical component of durable goods consumption has become more persistent, suggesting that shocks, such as the COVID‐19 pandemic, now result in more prolonged deviations from the long‐run equilibrium.

Intertemporal Consumption with Risk: A Revealed Preference Analysis

Abstract We run an experiment to elicit preferences over state-contingent timed payouts. We analyze the data using a newly revealed preference method (building on Nishimura et al., 2017) that can test for consistency with utility functions that increase with a given preorder. We find that correlation neutrality, a property implied by discounted expected utility, is widely violated and there is, instead, strong evidence of intertemporal correlation averse behavior. Our results suggest that utility is not additive across both states and time and that credible models of choice need to allow people to prefer negative correlation in timed payouts.

Intertemporal consumption and lifecycle in a pandemic context: an experimental approximation

The Covid-19 pandemic generated uncertainty among consumers, a slowdown in consumption and an increase of the added saving at world level, the microeconomic evidence showed a tendency towards dissaving and growing consumption. These variations activate questioning about the consequences of confinement in intertemporal consumption, at the same time they allow to provide new empirical evidence about life-cycle models in their standard or neoclassical and behavioral versions. The purpose of this work was to experimentally evaluate the intertemporal consumption patterns from the postulates of both life cycle models. To this end, an experimental simulation exercise of online purchases of commodities was carried out with the participation of 210 consumers who were subjected to treatments that included a baseline, income increase scenarios and no-income withdrawal scenarios. The results verified the existence of consistent responses with the behavioral model in 85% of the cases and with the standard model for the remaining 15%; that is, the tendencies to smooth consumption and increase savings were in the minority in the group evaluated and the confinement context did not translate into more self-controlled intertemporal consumption behaviors.

Cryptocurrency returns and consumption-based asset pricing

ABSTRACT This paper examines whether the cross-section of cryptocurrency returns is captured by risk factors based on consumption-based asset pricing. It is an imperative task for financial economists to find the fundamental risk behind characteristic-based cryptocurrency factors in order to economically understand cryptocurrency. To address the data availability issue in the analysis of cryptocurrency, we employ mixed data sampling (MIDAS) regression to check the relation between the principal component analysis (PCA) factors in cryptocurrency returns and the factors in the consumption capital asset pricing models (CCAPMs) and intertemporal capital asset pricing models (ICAPMs). We establish significant links between them, which in turn implies that cryptocurrency returns are investors’ compensation for bearing consumption risk, conditional consumption risk, and intertemporal consumption risk. This finding underscores that cryptocurrency returns are the manifestation of macroeconomic equilibrium derived from investors’ utility maximization.

Life-cycle model with subsistence consumption constraint and state-dependent utilities

This paper studies optimal decision-making for investment, consumption and life insurance with state-dependent utilities in continuous time. It is supposed that an economic agent has a subsistence consumption constraint and an uncertain lifetime horizon. The martingale approach coupled with duality theory has been employed to study the stochastic optimization problem of the economic agent. Specifically, the original optimization problem is transformed into a dual maximization problem involving a system of linear equations. Optimal strategies for investment, consumption and life-insurance purchases are obtained by maximizing the expected discounted utilities from intertemporal consumption, legacy and terminal wealth. Economic insights that may be gained from the solution to the problem are illustrated through numerical examples and case studies based on real data. Specifically, for the real-data case studies, an attention is given to studying the impacts of Covid 19 and the recent inflation on optimal strategies for consumption, investment and life-insurance purchases implied by the solution of our proposed model.

Procrastination and intertemporal consumption: A three-period extension of the CAPM with irrational agents

In this paper, we investigate the capital asset pricing model (CAPM) derived from a three-period general equilibrium model incorporating time-inconsistent preferences. We define and consider two types of agents, i.e. they can be either sophisticated or naive. Sophisticated agents take into account their potentially changing future preferences when making a decision. Naive agents, on the other hand, do not anticipate this issue and their related self-control problems when they plan the consumption path.We demonstrate that the derivation of the CAPM equation can be achieved even if the agents in the financial economy have time-inconsistent preferences.

Consumption and Liquidity Shocks

AbstractWe study the response of consumption to anticipated and unanticipated liquidity gains using information on gifts (occasional and recurrent) and severance pay from the Italian Household Income and Wealth survey. Consistent with standard intertemporal consumption models, we find that unanticipated income shocks affect nondurable consumption while anticipated shocks have no effect. In the former case, the marginal propensity to consume is estimated to be around 7%. We find also that this consumption response is stronger for poor households (around 10%) and negligible for rich ones.

Durable goods and consumer behavior with liquidity constraints

AbstractThis paper presents an integrated model of intratemporal demand and intertemporal consumption, with allowance for durable goods and liquidity constraints. Demand equations for non‐durable and durable goods with the user cost of durable goods are jointly estimated with a consumption Euler equation incorporating liquidity constraints for Norwegian consumers from 1978 to 2018. Results show that demand analyses ignoring durable goods lead to a significant bias in the elasticities of non‐durable goods. Norwegian consumers are found to be impatient, with low risk aversion. There is weak evidence for liquidity constraints in consumption. No strong evidence exists for intertemporal substitution in consumption, but a considerable effect of uncertainty is found in durable consumption.

Mistakes in Future Consumption, High MPCs Now

In a canonical intertemporal consumption model, future consumption mistakes (in response to saving changes) lead to higher current marginal propensities to consume (MPCs). These mistakes increase the value of changing current consumption relative to changing saving, as additional saving will not be spent optimally. Various behavioral biases can cause these mistakes, such as inattention, present bias, diagnostic expectations, and near-rationality (epsilon-mistakes). This result helps explain the empirical puzzle of high-liquidity consumers’ high MPCs. In my approach, predictions of sophistication (anticipation of future mistakes) can be derived independently of the underlying biases. (JEL D15, D91, E21)

Consumption and portfolio optimization with generalized stochastic differential utility in incomplete markets

This paper examines continuous time intertemporal consumption and portfolio choice problems of an investor in a generalized stochastic differential utility preference of Epstein–Zin type with subjective beliefs and with ambiguity, respectively. In these two situations, the aggregators of the utility both contain the “variability” process. Based on the generalized verification theorem which formulates Hamilton–Jacobi-Bellman equations under a weak non-Lipschitz condition, we show the explicit closed-form optimal consumption and portfolio solutions with subjective beliefs and the numerical solutions with ambiguity for Heston model in incomplete market, respectively.

Opposite ethical views converge under the threat of catastrophic climate change

Climate policy is often described by economists as an intertemporal consumption trade-off: consume all you want today and face climate damages in the future, or sacrifice consumption today to implement costly climate policies that will bring future benefits through avoided climate damages. If one assumes enduring technological progress, a society that is more averse to intertemporal inequalities should postpone climate policies and let future, richer generations pay more. Growing evidence however suggests that the trade-off is more complex: abrupt, extreme, irreversible changes to the climate may cause discontinuities to socio-economic systems, possibly leading to a sharp decline of human population and consumption per capita. In this paper, we show that, when accounting for a very small risk of catastrophic climate change, it is optimal to pursue stringent climate policies to postpone the catastrophe. Our results conform with the well-known conclusion that tight carbon budgets are preferred when aversion towards inequalities between generations is low. However, by contrast with previous studies, we show that stringent policies are also optimal when inequality aversion is high. The non-monotonicity of the influence of inequality aversion is due to the fact that, for a given investment in abatement, a higher inequality aversion gives a smaller weight to avoided future non-catastrophic damages, but a larger weight to the catastrophic outcome. We also explore the role of population ethics, and show that the size of the optimal carbon budget decreases with the social preference for large populations, although this parameter plays almost no role at extreme levels of inequality aversion. Our result demonstrates that views from opposite sides of the ethical spectrum in terms of inequality aversion converge in terms of climate policy recommendations, warranting immediate climate action.

A THREE‐STATE RATIONAL GREATER‐FOOL BUBBLE MODEL WITH INTERTEMPORAL CONSUMPTION SMOOTHING

AbstractWe construct a simple rational greater‐fool bubble model, where the motive for trade is intertemporal consumption smoothing. This yields an easy‐to‐understand bubble model with three states of the world, instead of the five required previously. Bubbles are more likely when asset sellers have profitable investment opportunities, but little wealth, so they sell shares in those opportunities to wealthier investors. “Bad sellers” then pretend to sell similar investment opportunities, creating potential bubble assets. Bubbles are possible even if alternative means of consumption smoothing are available. Also, antibubble policy can reduce the welfare of even the greater fools it is supposed to protect.

Tobacco excise tax reform: From the perspective of "tax to control tobacco" policy in China.

The consumption of tobacco is harmful to health and has huge social costs. "Tax to control tobacco" is a widely implemented tobacco control measure all over the world. In order to examine the achievements of two tobacco excise tax reforms in China in 2009 and 2015 on controlling tobacco consumption, we first establish an intertemporal consumption model for addictive goods, and then validate the effectiveness of the two tobacco excise tax reforms using a Continuous Difference-in-Differences Model based on the panel data from 294 cities in China from 2007 to 2018. The results show that the tobacco excise tax reform in 2015 considerably reduced tobacco consumption, while the reform in 2009 did not, providing empirical evidence on the importance of "price links to tax" for tobacco control. Additionally, the study discovers that the tax reform has a heterogeneous effect on the age of smokers, the price of cigarettes, and city size.

Co-jumps and recursive preferences in portfolio choices

This paper investigates a multivariate, dynamic, continuous-time optimal consumption and portfolio allocation problem when the investor faces recursive utilities. The economy we are considering is described through both diffusion and discontinuities in the dynamics. We derive an approximated closed-form solution to optimal rules by exploiting standard dynamic programming techniques. Our findings are manifold. First, we obtain dynamic optimal weights, inversely proportional to volatility. Second, we show that both co-jumps frequency and intensity play a crucial role, as they considerably limit potential losses in the investors’ wealth. Third, we prove that jumps in precision reinforce the effect of jumps in price, further reducing optimal allocation. Finally, we highlight how co-jumps may influence investors’ choices regarding intertemporal consumption.

Numerical Solution of Dynamic Quantile Models

This paper studies dynamic programming for quantile preference models, in which the agent maximizes the stream of the future τ-quantile utilities, for τ∈(0,1). We suggest numerical methods, based on value function iterations, for solving the quantile recursive dynamic programming, and computing value and policy functions. In addition, we extend theoretical results to allow the dynamic quantile model to have a finite-horizon, instead of infinite-horizon. To illustrate the methods, we use an intertemporal consumption quantile model that has an explicit closed form solution for both the value and policy functions. Based on this example, we assess the accuracy of the numerical methods by computing and comparing theoretical and numerical value and policy functions, for several combinations of the parameters – discount factor, elasticity of intertemporal substitution, and risk attitude, which is measured by the quantile. Results document evidence that the suggested algorithm provides numerical solutions that are very close to theoretical counterparts, and also illustrate the usefulness and practicality of the proposed methods.

Quantile Approach to Intertemporal Consumption with Multiple Assets

Quantile Approach to Intertemporal Consumption with Multiple Assets

老龄化视角下，商业健康险与城职保的共同发展路径探讨——基于跨期消费决策模型

老龄化视角下，商业健康险与城职保的共同发展路径探讨——基于跨期消费决策模型

A theory of progressive lending

We characterize Pareto efficient long term ‘relational’ lending contracts with one-sided lender commitment in a context where the borrower can accumulate wealth, has intertemporal consumption smoothing preferences, and the lender has some sanctioning power following default. We show the negative results of Bulow and Rogoff (1989) do not apply irrespective of the extent of sanctions, the borrower's preferences for smoothing, initial wealth or relative welfare weight. Borrowing, investment and wealth grow and converge to the first-best. Optimal allocations can be implemented by backloaded ‘progressive’ lending: a sequence of one period loans of growing size.

Intertemporal consumption and debt aversion: a replication and extension

We replicate Meissner (Exp Econ 19:281–298, 2016), where debt aversion was reported for the first time in an intertemporal consumption and saving problem. While Meissner (2016) uses a German sample, our participants are US undergraduate students. All of the original study’s main findings replicate with similar effect sizes. Additionally, we extend the original analysis by introducing a new individual index of debt aversion, which we use to compare debt aversion across countries. Interestingly, we find no significant differences in debt aversion between the original German and the new US sample. We then test whether debt aversion correlates with individual characteristics such as gender, cognitive reflection ability, and risk aversion. Overall, this paper confirms the importance of debt aversion in intertemporal consumption and saving problems and validates the approach of Meissner (2016).