INSTANTANEOUS GRATIFICATION

Abstract. We propose a tractable continuous-time model that captures the key psychological properties of the discrete-time quasi-hyperbolic discount function. Like the discrete-time model, our ‘instantaneous-gratification ’ model reflects consumers’ preference to act impatiently in the short run and patiently in the long run. Unlike the discrete-time model, the instantaneous-gratification model generates policy functions that are continuous and monotonic, admits only one equilibrium, and features a single welfare criterion. We illustrate these useful properties using a standard consumption model with liquidity constraints. The instantaneous-gratification model eliminates the problematic and counterfactual properties of the discrete-time hyperbolic model, but preserves the model’s desirable psychological features