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Consumption-Savings Decisions with Quasi-Geometric Discounting

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Author Info
Per Krusell
Anthony A. Smith, Jr.

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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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Paper provided by Carnegie Mellon University, Tepper School of Business in its series GSIA Working Papers with number 2001-05.

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Handle: RePEc:cmu:gsiawp:-262397081

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Postal: Tepper School of Business, Carnegie Mellon University, 5000 Forbes Avenue, Pittsburgh, PA 15213-3890
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  1. Quantitative Macroeconomics and Real Business Cycles (QM&RBC)
References listed on IDEAS
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  1. Per Krusell & Jose-Victor Rios-Rull, 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. [Downloadable!] (restricted)
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  2. Asheim, G.B., 1991. "Individual and Collective Time Consistency," Papers 9169, Tilburg - Center for Economic Research.
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This page was last updated on 2008-9-16.

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