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General Equilibrium Dynamics with Naive and Sophisticated Hyperbolic Consumers in an Overlapping Generations Economy

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  • Takeshi Ojima
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    Abstract

    Using an overlapping generations model, this paper describes interactions between naive and sophisticated hyperbolic discounters in general equilibrium. The naifs, who overestimate their future propensity to save and hence over-forecast the future equilibrium asset prices, are exploited through capital transactions by sophisticates, who correctly forecast the future asset prices by incorporating the naifsf mis-forecasts. Due to the capital losses, the naifs fall into bankruptcy when they are highly present-biased, highly patient, and having a low population density. Under generous conditions, the equilibrium is shown to be globally stable and Pareto inefficient in the ex-post sense.

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    File URL: http://www.iser.osaka-u.ac.jp/library/dp/2013/DP0886R.pdf
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    Bibliographic Info

    Paper provided by Institute of Social and Economic Research, Osaka University in its series ISER Discussion Paper with number 0886r.

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    Date of creation: Sep 2013
    Date of revision: Jan 2014
    Handle: RePEc:dpr:wpaper:0886r

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    1. Laibson, David I., 1997. "Golden Eggs and Hyperbolic Discounting," Scholarly Articles 4481499, Harvard University Department of Economics.
    2. O'Donoghue, Ted & Rabin, Matthew, 1997. "Doing It Now or Later," Department of Economics, Working Paper Series qt7t44m5b0, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    3. Ted O' Donoghue and Matthew Rabin., 2000. "Choice and Procrastination," Economics Working Papers E00-281, University of California at Berkeley.
    4. Robert J. Barro, 1999. "Ramsey Meets Laibson In The Neoclassical Growth Model," The Quarterly Journal of Economics, MIT Press, vol. 114(4), pages 1125-1152, November.
    5. Erzo G. J. Luttmer & Thomas Mariotti, 2003. "Subjective Discounting in an Exchange Economy," Journal of Political Economy, University of Chicago Press, vol. 111(5), pages 959-989, October.
    6. Sorger, Gerhard, 2007. "Time-preference and commitment," Journal of Economic Behavior & Organization, Elsevier, vol. 62(4), pages 556-578, April.
    7. Meier, Stephan & Sprenger, Charles, 2009. "Present-Biased Preferences and Credit Card Borrowing," IZA Discussion Papers 4198, Institute for the Study of Labor (IZA).
    8. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, vol. 66, pages 467.
    9. Tirole, Jean, 1985. "Asset Bubbles and Overlapping Generations," Econometrica, Econometric Society, vol. 53(6), pages 1499-1528, November.
    10. Wong, Wei-Kang, 2008. "How much time-inconsistency is there and does it matter? Evidence on self-awareness, size, and effects," Journal of Economic Behavior & Organization, Elsevier, vol. 68(3-4), pages 645-656, December.
    11. Gabrieli, Tommaso & Ghosal, Sayantan, 2009. "Non-Existence of Competitive Equilibria with Dynamically Inconsistent Preferences," The Warwick Economics Research Paper Series (TWERPS) 900, University of Warwick, Department of Economics.
    12. Paul Heidhues & Botond Koszegi, 2010. "Exploiting Naivete about Self-Control in the Credit Market," American Economic Review, American Economic Association, vol. 100(5), pages 2279-2303, December.
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