TITLE:
Quasi-Hyperbolic Discounting and the Existence of Time-Inconsistent Retirement
AUTHORS:
T. Scott Findley, James A. Feigenbaum
KEYWORDS:
Quasi-Hyperbolic Discounting; Retirement; Life-Cycle Consumption/Saving Theory; Time Inconsistency
JOURNAL NAME:
Theoretical Economics Letters,
Vol.3 No.2,
April
30,
2013
ABSTRACT: The decision about how much to save for
retirement is likely to be dependent on when an individual plans to be retired,
and vice versa. Yet, the established literature on hyperbolic discounting and
life-cycle saving behavior has for the most part abstracted from choice over
retirement. Two notable exceptions are Diamond and Koszegi [1] and an important
follow-up study by Holmes [2], which demonstrates that time-inconsistent
retirement timing is impossible when saving behavior is explicitly modeled in a
stylized three-period setting. In this paper, we build upon the framework of
Diamond and Koszegi [1] and Holmes [2] by generalizing the assumptions about
initial income and assets. We show analytically and via simple numerical
examples that time-inconsistent retirement can exist in a three-period
life-cycle model of consumption and saving.