UC Riverside

Empirical evidence shows that the exponential discount function employed in standard macroeconomic models falls short on two counts: it implies time-consistent preferences and assumes that the discount factor is a constant, exogenous parameter. As discounting behavior is crucial in the determination of individual intertemporal choice, it seems reasonable to expect that deviating from the standard exponential discounting behavior would significantly affect aggregate outcomes. Thus so, the main question of this dissertation is, "What are the macroeconomic and welfare consequences of time-inconsistent and endogenous discounting?" In this endeavor, this research focuses on three important applications: 1) on resource allocation and welfare in a social planner's economy; 2) on raising the retirement age in an economy where time-consistent and time-inconsistent discounters co-exist; and 3) on monetary policy effectiveness in a standard neoclassical growth model. Indeed, the results show that moving beyond exponential discounting affects both macroeconomic and welfare outcomes to the extent that policy recommendations based on exponential discounting must at the very least be taken with a grain of salt.