Discounted Incremental Utility Model of Intertemporal Choice

A new model of intertemporal choice — "discounted incremental utility" (DIU) — is presented. DIU coincides with Samuelson's discounted utility (constant/exponential discounting) when utility function is linear. DIU has several advantages over discounted utility (and its generalizations — quasi-hyperbolic and generalized hyperbolic discounting): a) time preferences are continuous; b) utility does not increase when a larger payoff is split into two smaller payoffs, one of which is slightly delayed in time; c) utility is not separable across time periods, i.e. the model allows for intertemporal wealth, complementarity and substitution effects. The model can also rationalize several behavioral regularities such as a greater impatience for immediate outcomes if the assumption of constant/exponential discounting is relaxed. An application to intertemporal consumption/saving reveals that consumers may exhibit dynamic inconsistency. Initially, they commit to saving for future consumption but, as time passes, they prefer to renegotiate such a contract for an advance payment. Behavioral characterization/axiomatization of the new model is presented