Consumption--Savings Decisions with Quasi--Geometric Discounting
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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Volume (Year): 71 (2003)
Issue (Month): 1 (January)
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- Asheim, G.B., 1996.
"Individual and Collective Time-Consistency,"
20/1996, Oslo University, Department of Economics.
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