Working Paper: NBER ID: w9629
Authors: Christian Gollier; Richard Zeckhauser
Abstract: We examine the investment decision problem of a group whose members have heterogeneous time preferences. In particular, they have different discount factors for utility, possibly not exponential. We characterize the properties of efficient allocations of resources and of shadow prices that would decentralize such allocations. We show in particular that the term structure of interest rates is decreasing when all members have DARA preferences. Heterogeneous groups should not use exponential discounting for their collective investment decisions even if all agents discount exponentially. We also exhibit conditions that lead the representative agent to have a rate of impatience that decreases with GDP per capita.
Keywords: No keywords provided
JEL Codes: H43; E43; E21; E40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| heterogeneous individual exponential discounting (D15) | collective hyperbolic discounting (D15) |
| individual tolerances to consumption fluctuations (D11) | rate of impatience of the representative agent (D15) |
| competitive interest rate (E43) | efficient allocation of resources (D61) |
| rate of impatience of the representative agent (D15) | efficient allocation of resources (D61) |
| economic development (O29) | rate of impatience in investment decisions (G11) |