Re: Market failure to sufficently weigh the future?

Date: Fri Oct 27 2000 - 20:14:17 MDT

[Resending, apologies if this is a repost]

Robin pointed to:

> The Social Discount Rate
> Andrew Caplin, John Leahy
> NBER Working Paper No. W7983 Issued in October 2000
> In welfare theory it is standard to pick the consumption stream that
> maximizes the welfare of the representative agent. We argue against this
> position, and show that a benevolent social planner will generally place a
> greater weight on future consumption than does the representative agent. Our
> analysis has immediate implications for public policy: agents discount the
> future too much and the government should promote future oriented policies.

I paid the $5 to download this paper, and while I've just read the first
10 pages or so, I'm not sure I agree with their model of time preferences.

Their basic point seems to be that people prefer present pleasure over
future pleasure, but then when they get to the future, they regret their
past choices. I don't think this is as universal as they make it out
to be, although certainly there are some instances in which it happens.

IMO people are mostly relatively satisfied with their past choices,
and don't usually regret past pleasures, wishing that they had been
postponed so that they could be enjoyed today. Yet that seems to be
what the authors' time preference model implies.

Suppose you have a rare treat, bananas, which you love and which aren't
usually available out of season. You have ten bananas. You could eat
them all today, or you could spread them out, one a day perhaps.

The author's model would have you doing something like setting up a plan
to have 4 bananas today, 3 tomorrow, 2 the next day and 1 the last day.
The idea is that consumption today is worth more to you than consumption
tomorrow, and consumption the next day worth still less, and so on.

Then, tomorrow, you regret having already eaten 4 bananas so that you
only have 6 left. If only you'd been nicer to your future self, and
saved more bananas for today. Nevertheless, today's bananas are still
worth more than tomorrows, so you go ahead and eat 3 of the 6 bananas
today, planning on eating 2 tomorrow and 1 the next day.

Then, the next day, you mentally kick yourself for having pigged out on
all those bananas already, so that you only have 3 left. Still, bananas
today are worth more than those tomorrow, so you eat 2 of your 3 today,
saving only 1 for tomorrow.

Then, on the last day, you are miserably unhappy that you've eaten 9 of
your bananas so quickly, but you go ahead and eat the one remaining one
rather than save it, because consumption today is better than consumption

And finally, on the following days, you wallow in sorrow for having
eaten all the bananas so soon.

While this little story does have enough of a germ of truth that we can
recognize some elements in our own lives, I think it is not a universal
experience for all of our consumption. It has a childish quality, the
stupidity and naivity of our character as he continually berates himself
for behaviors in the past which he continues to follow in the present.
His inability to learn from his mistakes, while a weakness that we can all
identify with to some extent, is something that most of us can overcome.


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