The Beta-Delta-DELTA Sweet Spot / David Laibson, Peter Maxted.

Format:

Book

Author/Creator:

Laibson, David.

Contributor:

National Bureau of Economic Research.

Maxted, Peter.

Series:

Working Paper Series (National Bureau of Economic Research) no. w30822.

NBER working paper series no. w30822

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2023.

Summary:

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.

Notes:

Print version record

January 2023.