HSE SPb & EUSP Research Seminar on October, 24: Mikhail Pakhnin (European University at St. Petersburg)
Topic: On Hyperbolic Discounting and Observational Equivalence
Date & Time: October, 24; 18:00 - 19:30
Venue: St Petersburg, Fontanka river embankment, 27, PDMI RAS, Marble hall (2nd floor)
We invite you to participate in the HSE in St Petersburg and European University in St Petersburg Research seminar on October, 24.
Mikhail Pakhnin (European University at St. Petersburg) will give a talk on On Hyperbolic Discounting and Observational Equivalence.
Time: 18:00 - 19:30
Venue: St Petersburg, Fontanka river embankment, 27, PDMI RAS, Marble hall (2nd floor)
Abstract: As is well known, standard economic growth models employ the assumption of exponential discounting. While analytically tractable and convenient, this assumption is not supported empirically. In contrast, empirical evidence suggests that people discount hyperbolically rather than exponentially. A famous Barro (1999) result maintains that hyperbolic discounting is observationally equivalent to exponential discounting. In this paper, however, we show that this result holds true only under restrictive conditions.
We consider the Ramsey model and begin with discussion of the time-inconsistency problem arising under hyperbolic discounting. We define the concept of a sliding equilibrium path, clarify the role of expectations for sliding equilibrium paths and introduce pseudo-perfect and super-perfect expectations. We study the problem of observational equivalence (i.e., whether a sliding equilibrium path coincides with an optimal path in a standard model with exponential discounting) and prove some results which suggest that in general observational equivalence does not hold except for a number of very special cases. We also provide several applications showing how hyperbolic discounting contributes towards an increasing saving rate along transitional paths (in line with empirical evidence) and increasing income/wealth inequality (in contrast to what is implied by a standard model with exponential discounting).
Calendar: https://tinyurl.com/spbecon
Research seminar webpage: https://spb.hse.ru/en/scem/ilgt/hse-eusp-seminar