The implication of the hyperbolic discount model for the annuitisation decisions

The low demand for immediate annuities at retirement has been a long-standing puzzle. We show that a hyperbolic discount model can explain this behaviour and results in the attractiveness of long-term deferred annuities. With a set of benchmark assumptions, we find that retirees would be willing to pay a much higher price than the actuarial fair price for annuities with longer deferred periods. Moreover, if governments were to introduce a pre-commitment device which requires pensioners to make annuitisation decisions around 10 years before retirement, the take up rate of annuities could become higher.

The effects of applying alternative discounting methods on the economic feasibility test of Free Trade Zone development project

Purpose The purpose of this paper is to examine the applicability of the alternative way of discounting, such as the hyperbolic discount method, for the economic feasibility test on Free Trade Zone development project that needs intergenerational analysis. Design/methodology/approach To analyze the effects of applying alternative discounting method in the cost-benefit analysis, this paper uses the hyperbolic discount method and HM-Treasury’s method (Britain), as well as the traditional exponential discount method. Also, this study uses benefit and cost data from the actual feasibility test of the Free Trade Zone development project in Korea, to obtain better policy implication. Findings For the case of long-term analysis, using the exponential discounting method in the benefit-cost analysis could not give us balanced analytic results, because it discounts too much on future generation’s benefits. In contrast, if we use the hyperbolic discounting method, we could obtain better balanced results since it can control the generational effects. This paper also finds that for the results to be valid, the analysis period must be expanded long enough (a minimum of 100 years). Originality/value The major findings of this paper confirm the results of previous studies regarding long-term benefit-cost analysis. Also, the result of this paper is properly compatible with the findings of behavioral economics, such as the time inconsistency of preferences. However, no research has been done with the proper length of analytic periods for using hyperbolic discounting yet. To examine this matter, this paper performs benefit-cost analysis with actual data from the feasibility studies in Korea. To the best of the author’s knowledge, this is the first study to find the proper length of analytic periods that can be compatible with the hyperbolic discount method.

Maximin: a direct approach to sustainability

We solve directly a general maximin (sustainment, intergenerational-equity) problem. Because the shadow values of a maximin problem do not correspond to the shadow values from a general discounted-utility solution, they correspond to the prices of only a very special competitive economy. Virtual discount factors for the economy arise. They do not correspond to hyperbolic discount factors. Hartwick's rule is derived and generalized naturally to take into account non-autonomous and non-deterministic features of the economy. Under uncertainty, Hartwick's rule is the analytic expression of a form of precautionary principle. Hotelling's rule is a necessary condition, but may be more complex than has been appreciated in simple models. Some interpretations of strong sustainment are special cases of weak sustainment but, paradoxically, may be more difficult to solve.

Three other motivational factors

Ainslie uses his hyperbolic discount model to explain a dazzling array of puzzling motivational phenomena. In so doing, he assumes that the motivational force of a given option at a given time is directly proportional to its discount-adjusted reward as assessed at that time. He overlooks three other factors which, independently of the perceived reward, can affect motivational force.