Golden Eggs and Hyperbolic Discounting

Hyperbolic discount functions induce dynamically inconsistent preferences, implying a motive for consumers to constrain their own future choices. This paper analyzes the decisions of a hyperbolic consumer who has access to an imperfect commitment technology: an illiquid asset whose sale must be initiated one period before the sale proceeds are received. The model predicts that consumption tracks income, and the model explains why consumers have asset-speciŽc marginal propensities to consume. The model suggests that Žnancial innovation may have caused the ongoing decline in U. S. savings rates, since Žnancial innovation increases liquidity, eliminating commitment opportunities. Finally, the model implies that Žnancial market innovation may reduce welfare by providing “too much” liquidity.