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Consumption--Savings Decisions with Quasi--Geometric Discounting

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  • Per Krusell

    ()
    (University of Rochester, NY, U.S.A., and Centre for Economic Policy Research, and the Institute for International Economic Studies)

  • Anthony A. Smith, Jr.

    ()
    (Carnegie Mellon University Pittsburgh, U.S.A.)

Abstract

How do individuals with time-inconsistent preferences make consumption-savings decisions? We try to answer this question by considering the simplest possible form of consumption-savings problem, assuming that discountingg is quasi-geometric. A solution to the decision problem is then a subgame-perfect equilibrium of a dynamic game between the individual's "successive selves." When the time horizon is finite, our question has a well-defined answer in terms of primitives. When the time horizon is infinite, we are left without a sharp answer: we cannot rule out the possibility that two identical individuals in the exact same situation make different decisions! In particular, there is a continuum of dynamic equilibria even if we restrict attention to equilibria where current consumption decisions depend only on current wealth.

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Bibliographic Info

Article provided by Econometric Society in its journal Econometrica.

Volume (Year): 71 (2003)
Issue (Month): 1 (January)
Pages: 365-375

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Handle: RePEc:ecm:emetrp:v:71:y:2003:i:1:p:365-375

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  1. Asheim, G.B., 1991. "Individual and Collective Time Consistency," Papers 9169, Tilburg - Center for Economic Research.
  2. Jose-Victor Rios-Rull & Per Krusell, 1999. "On the Size of U.S. Government: Political Economy in the Neoclassical Growth Model," American Economic Review, American Economic Association, vol. 89(5), pages 1156-1181, December.
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  1. Quantitative Macroeconomics and Real Business Cycles (QM&RBC)

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