Quasi-Hyperbolic Discounting and the Existence of Time-Inconsistent Retirement

Abstract

The decision about how much to save for retirement is likely to be dependent on when an individual plans to be retired, and vice versa. Yet, the established literature on hyperbolic discounting and life-cycle saving behavior has for the most part abstracted from choice over retirement. Two notable exceptions are Diamond and Koszegi [1] and an important follow-up study by Holmes [2], which demonstrates that time-inconsistent retirement timing is impossible when saving behavior is explicitly modeled in a stylized three-period setting. In this paper, we build upon the framework of Diamond and Koszegi [1] and Holmes [2] by generalizing the assumptions about initial income and assets. We show analytically and via simple numerical examples that time-inconsistent retirement can exist in a three-period life-cycle model of consumption and saving.