Work

The Beta-Delta-DELTA Sweet Spot

Year: 2023

Type: report

Abstract: When solving discrete-time consumption models with present-biased time preferences, backwards induction generates equilibria that are non-robust in the sense that policy functions are often sensitive to parameter choices, including the modeler's choice of the time-step.The current paper identifies a range of "sweet-spot" time-steps that (i) contains the psychologically relevant present bias horizons, and, (ii) generates numerically indistinguishable (i.e., robust) policy functions.This sweet spot includes both a computationally feasible range of discrete-time cases and the limiting continuous-time case (Harris and Laibson, 2013).Accordingly, researchers modeling present bias in buffer stock models can choose either discrete-time cases calibrated to be in the sweet spot or the analytically tractable continuous-time case; these approaches yield essentially identical policy functions.

Source: National Bureau of Economic Research

DOI: 10.3386/w30822

Authors: David I. Laibson, Peter Maxted

Institutions: National Bureau of Economic Research, Harvard University, University of California, Berkeley

Language: English

Topic: Decision-Making and Behavioral Economics

Subfield: General Decision Sciences

Field: Decision Sciences

Domain: Social Sciences

Open Access status: green

Funders: U.S. Social Security Administration, Harvard University, Institute for Quantitative Social Science, Harvard University, Australian Government, Faculty of Arts and Sciences

Award: G7711573436

OpenAlex ID: W4313886455

Cites: 51

Cited by: 6

Related to: 10