A new approach - deriving expected future income for intertemporal models

Abstract

Individuals' current consumption decisions are influenced by the prospect of future income. This paper discusses a method for inferring agents' future (expected) income based on expectations of future states of the environment. Psychology, risk, the probability of future events occurring, etc. play an important role in this area. These essential parts have been incorporated into a simplified model that will make it easier for us to determine the value of future income and serve to more accurately incorporate agents' positive or negative expectations into intertemporal two-period or overlapping-generation models. This paper brings a new approach to this issue based on prospect theory and reference point theory. The issue is addressed only at the microeconomic level, while this approach can easily be aggregated into macroeconomic models.