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Consumption-Savings Decisions with Quasi-Geometric Discounting

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Author Info
Krusell, Per
Smith Jr., Anthony A

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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 discounting 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 C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2651.

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Date of creation: Jan 2001
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Handle: RePEc:cpr:ceprdp:2651

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Related research
Keywords: Indeterminacy Quasi-Geometric Discounting Time Inconsistency

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Find related papers by JEL classification:
C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
D90 - Microeconomics - - Intertemporal Choice and Growth - - - General
E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

This item is featured on the following reading lists:

  1. Quantitative Macroeconomics and Real Business Cycles (QM&RBC)
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  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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