Non-Constant Discounting in Continuous Time
AbstractThis note derives the dynamic programming equation (DPE) to a differentiable Markov Perfect equilibrium in a problem with non-constant discounting and general functional forms. We begin with a discrete stage model and take the limit as the length of the stage goes to 0 to obtain the DPE corresponding to the continuous time problem. We characterize the multiplicity of equilibria under non-constant discounting and discuss the relation between a given equilibrium of that model and the unique equilibrium of a related problem with constant discounting. We calculate the bounds of the set of candidate steady states and we Pareto rank the equilibria.
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Date of creation: 05 Jan 2004
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hyperbolic discounting; time consistency; Markov equilibria; non-uniqueness; observational equivalence; Pareto efficiency;
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