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Satiation in Discounted Utility

Department of Decision Analysis, IESE Business School, University of Navarra, Barcelona, Spain
Decisions, Operations, and Technology Management Area, Anderson School of Management, University of California, Los Angeles, California 90095
mbaucells{at}iese.edu
rakesh.sarin{at}anderson.ucla.edu

In this paper, we propose a model of intertemporal choice that explicitly incorporates satiation due to previous consumption in the evaluation of the utility of current consumption. In the discounted utility (DU) model, the utility of consumption is evaluated afresh in each time period. In our model, the utility of current consumption represents an incremental utility from the past level. When the time interval between consumption periods is large, and there are, therefore, no carryover effects, our model coincides with the DU model. For short time intervals between consumption periods, the satiation due to previous consumption lowers the utility of current consumption. Several implications of our model are examined, and comparisons with the DU model and the habituation model are made.

Subject classifications: satiation; time preference; local substitution.
History: Received July 2004; revision received December 2005; accepted December 2005.