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Gong Liutang and Zhu Shenghao
''Does observational equivalence always hold in hyperbolic discounting models?''
( 2006, Vol. 5 No.8 )
Observation equivalence holds in the hyperbolic discounting models such as Laibson (1996), Barro (1999), and Krusell et al (2002). We study a hyperbolic discounting model where the policy function cannot be replicated by a geometric discounting model. Under the logarithmic utility and Cobb-Douglas production, we obtain the explicit solution for consumer's consumption-saving decision. Different from the literatures of exponential discounting, our model shows that the habit persistence affects consumer''s consumption-saving decision. Therefore, observational equivalence does not hold in our hyperbolic discounting model.
Keywords: Consumption function
JEL: E2 - Macroeconomics: Consumption, Saving, Production, Employment, and Investment: General (includes Measurement and Data)
D1 - Household Behavior: General
Manuscript Received : May 16 2006 Manuscript Accepted : May 17 2006

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