Time-inconsistent preferences in a general equilibrium model
AbstractThis paper introduces time-inconsistent preferences in a multi-commodity general equilibrium framework with incomplete markets. The standard concept of competitive equilibrium is extended in order to allow for changes in intertemporal preferences. Depending on whether or not agents recognize that their intertemporal preferences change, agents are called sophisticated or naÃ¯ve. This paper presents competitive equilibrium notions for economies with naÃ¯ve agents and economies with sophisticated agents and provides assumptions under which both types of equilibria exist. Surprisingly, the set of naÃ¯ve equilibria of societies populated by time-consistent households is not allocationally equivalent to the set of competitive equilibria. For sophisticated equilibria, the equivalence holds. Time-inconsistency also raises conceptual issues about the appropriate concept of efficiency. Choices have to be made concerning the incorporation of future preferences and the appropriate instruments to create Pareto improvements. For both naÃ¯ve and sophisticated societies, we present four possible efficiency concepts. Suitable conditions are specified for which both naÃ¯ve and sophisticated equilibria satisfy appropriate efficiency concepts.
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Bibliographic InfoPaper provided by Maastricht University in its series Open Access publications from Maastricht University with number urn:nbn:nl:ui:27-12157.
Date of creation: 2006
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Publication status: Published in Economic theory (2006) v.29, p.591-619
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Other versions of this item:
- P. Herings & Kirsten Rohde, 2006. "Time-inconsistent preferences in a general equilibrium model," Economic Theory, Springer, vol. 29(3), pages 591-619, November.
- Herings,Jean-Jacques & Rohde,Kirsten I.M., 2004. "Time-inconsistent Preferences in a General Equilibrium Model," Research Memoranda 016, Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization.
- D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
- D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
- D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving
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