ECON-2006EG Study Guide - Quiz Guide: Exponential Discounting, Dynamic Inconsistency, Second Epistle Of John
7 Mar 2021
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A popular way to represent present-biased preferences is using a quasi-hyperbolic discounting function or beta-delta function. This function adds one additional parameter to the exponential discounting function that modi es the relative weight on the present compared to all later periods. The relative weights between all later periods remain unchanged. According to the beta-delta function, the intertemporal utility u0(u) of a utility stream u= {u0, u1, u2, } from the point of view of t = 0 is: If =1 the function is identical to the delta function, there is exponential discounting. However, when < 1 all periods beyond today get discounted by more than under exponential discounting and hence preferences are present-biased. To illustrate that the beta delta function can lead to time inconsistency consider the following situation. John likes to run and plans to run a marathon on sunday.
