Time consistent discounting

A possibly immortal agent tries to maximise its summed discounted rewards over time, where discounting is used to avoid infinite utilities and encourage the agent to value current rewards more than future ones. Some commonly used discount functions lead to time-inconsistent behavior where the agent changes its plan over time. These inconsistencies can lead to very poor behavior. We generalise the usual discounted utility model to one where the discount function changes with the age of the agent. We then give a simple characterisation of time-(in)consistent discount functions and show the existence of a rational policy for an agent that knows its discount function is time-inconsistent

Evidence and Ideology in Macroeconomics: The Case of Investment Cycles

The paper reports the principal findings of a long term research project on the description and explanation of business cycles. The research strongly confirmed the older view that business cycles have large systematic components that take the form of investment cycles. These quasi-periodic movements can be represented as low order, stochastic, dynamic processes with complex eigenvalues. Specifically, there is a fixed investment cycle of about 8 years and an inventory cycle of about 4 years. Maximum entropy spectral analysis was employed for the description of the cycles and continuous time econometrics for the explanatory models. The central explanatory mechanism is the second order accelerator, which incorporates adjustment costs both in relation to the capital stock and the rate of investment. By means of parametric resonance it was possible to show, both theoretically and empirically how cycles aggregate from the micro to the macro level. The same mathematical tool was also used to explain the international convergence of cycles. I argue that the theory of investment cycles was abandoned for ideological, not for evidential reasons. Methodological issues are also discussed

Asset Pricing with Horizon-Dependent Risk Aversion

We study general equilibrium asset prices in a multi-period endowment economy when agents' risk aversion is allowed to depend on the maturity of the risk. We find horizon-dependent riskaversion preferences generate a decreasing term structure of risk premia if and only if volatility is stochastic. Our model can thus justify the recent empirical results on the term structure of risk premia if the pricing of volatility risk is downward sloping (in absolute value) in the data and if downward-sloping term structures of returns on a given market are driven solely by exposures to volatility risk. We test these predictions by estimating the price of volatility risk using index options data and by showing that the value premium is related to the exposure to volatility risk

Preferences, Income, and Life Satisfaction: An Equivalence Result

In this paper I investigate the nexus between life time utility (life satisfaction) and income predicted by the standard model of endogenous economic growth under different behavioral assumptions. The solution rationalizes why the empirical association between income and life satisfaction is approximately log-linear. I show that the solution is observationally equivalent when individuals compare their consumption (i) with others, (ii) with their own past consumption achievements, and (iii) not at all (ordinary preferences). This finding suggests that the observed slope of the income - life satisfaction curve is uninformative about human behavior driven by referencedependent utility. In particular, the hypothesis that the flattening of the life satisfaction curve at high income levels indicates that people are comparing their consumption too much with others or own past achievements is not supported by the workhorse model of endogenous economic growth

On the Restrictiveness of Separability: The Significance of Energy in German Manufacturing

Any researcher would certainly agree with Hamermesh?s (1993:34) intuition about separability that the ease of substitution between any two production factors should be unaffected by a third factor that is separable from the others. This paper emphasizes that such a notion of separability needs to be more restrictive than the classical separability concept is.We thus coin the notion of strict separability that implies the classical concept. By applying both separability concepts in a translog approach to German manufacturing data (1978?1990), we focus on the empirical question of whether the omission of energy affects the conclusions about the ease of substitution among nonenergy factors. We find ample empirical evidence to doubt the assumption that energy is separable from all other production factors even in the relatively mild form of classical separability. At least under separability aspects, therefore, energy appears to be an indispensable production factor

Intertemporal Efficiency and Equity Under Hyperbolic Preferences. Ex Ante Versus Ex Post Procrastination

In this paper I extend the well known result that a hyperbolically discounting agent postpones costs into the future. If society has hyperbolic inter-temporal preferences, it may be optimal from an ex ante point of view to postpone structural change from a polluting to a non polluting production sector into the future (ex ante procrastination). The consequences of ex ante procrastination are discussed for three different behavioral patterns. I show that, depending on the assumed behavioral regime, ex ante procrastination may lead to ex post procrastination, i.e. de facto no investment in the non polluting sector is undertaken over the whole time horizon, although investment was optimal from an ex ante point of view. Furthermore, the ex post implemented investment plan may be inefficient if it is not dictatorial. Hence, in the case of hyperbolic preferences there is a potential trade-off between inter-temporal efficiency and equity

Led into Temptation? Rewarding Brand Logos Bias the Neural Encoding of Incidental Economic Decisions

Human decision-making is driven by subjective values assigned to alternative choice options. These valuations are based on reward cues. It is unknown, however, whether complex reward cues, such as brand logos, may bias the neural encoding of subjective value in unrelated decisions. In this functional magnetic resonance imaging (fMRI) study, we subliminally presented brand logos preceding intertemporal choices. We demonstrated that priming biased participants' preferences towards more immediate rewards in the subsequent temporal discounting task. This was associated with modulations of the neural encoding of subjective values of choice options in a network of brain regions, including but not restricted to medial prefrontal cortex. Our findings demonstrate the general susceptibility of the human decision making system to apparently incidental contextual information. We conclude that the brain incorporates seemingly unrelated value information that modifies decision making outside the decision-maker's awareness