Decreasing Impatience: A Criterion for Non-stationary Time Preference and "Hyperbolic" Discounting

Despite recent interest in hyperbolic discounting, there has been little discussion of exactly what property of time preferences is instantiated by hyperbolic or quasi-hyperbolic functional forms. The paper revives an earlier proposal in <link rid="b33">Prelec (1989)</link> that the key property is Pratt-Arrow convexity of the log of the discount function, which corresponds to "decreasing impatience"(DI) at the level of preferences. DI provides a natural criterion for assessing the severity of departure from stationarity in that greater DI is equivalent to more choices of dominated options in two-stage decision problems, as well as greater convexity of the log of the discount function. Inefficient choices may arise as intentional precommitments, or as unintended reversals of preference by "naïve" agents. Copyright The editors of the "Scandinavian Journal of Economics", 2004 .