Document Type

Discussion Paper

Publication Date

8-1-2017

CFDP Number

2099R

CFDP Revision Date

February 1, 2018

CFDP Pages

48

Journal of Economic Literature (JEL) Code(s)

D11, D15, D91

Abstract

We introduce and characterize a recursive model of dynamic choice that accommodates naivete about present bias. While recursive representations are important for tractable analysis of in nite-horizon problems, the commonly-used Strotz model of time inconsistency presents well-known technical difficulties in extensions to dynamic environments. Our model incorporates costly self-control in the sense of Gul and Pesendorfer (2001) to overcome these hurdles. The important novel condition is an axiom for naivete. We first introduce appropriate definitions of absolute and comparative naivete for a simple two-period model, and explore their implications for the costly self-control model. We then develop suitable extensions of these definitions to in nite-horizon environments. Incorporating the definition of absolute naivete as an axiom, we characterize a recursive representation of naive quasi-hyperbolic discounting with self-control for an individual who is jointly overoptimistic about her present-bias factor and her ability to resist instant gratification. We also study the implications of our proposed comparison of naivete for this recursive representation and uncover new restrictions on the present-bias and self-control parameters that characterize comparative naivete. Finally, we discuss the subtleties that preclude more general notions of naivete, and illuminate the impossibility of a definition that simultaneously accommodates both random choice and costly self-control.

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