Backward Discounting

We study a model in which lifetime individual utility is derived from both present and past consumption streams. Each of these streams is discounted, the former forward in the usual way, the latter backward. We presume that an individual at date t evaluates consumption programs according to some weighted average of her own felicity (as perceived at date t) and that of “future selves” at dates greater than t. This simple formulation allows agents to partially anticipate future regret in current decisions, and generates a set of novel testable implications in line with empirical evidence. The model is used to capture the notion of parental influence and investigate its impact on equilibrium savings. The paper also examines other applications of “backward discounting.”