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Hyperbolic discounting and secondary markets

  • Nocke, Volker
  • Peitz, Martin

We study the effect of hyperbolic discounting on competitive equilibria in secondary markets for a durable good. Under exponential discounting, secondary markets are irrelevant in our model. They do not affect the price in the initial period and are neutral to the allocation. Under hyperbolic discounting, secondary markets are not neutral: they do affect price and allocation. The price in the unique competitive Markov equilibrium is lower than the price in the absence of secondary markets. This affects the equilibrium supply of the durable good in the initial period. We characterise all stationary competitive equilibria in terms of prices. In particular, we obtain that there are stationary competitive equilibria in which trade occurs in each period and the allocation of the durable good is inefficient. Furthermore, we show that there exist competitive equilibria with increasing, decreasing, and cycling price paths, despite the stationarity of the market environment.

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Article provided by Elsevier in its journal Games and Economic Behavior.

Volume (Year): 44 (2003)
Issue (Month): 1 (July)
Pages: 77-97

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Handle: RePEc:eee:gamebe:v:44:y:2003:i:1:p:77-97
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622836

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  1. Laibson, David, 1997. "Golden Eggs and Hyperbolic Discounting," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 443-77, May.
  2. Volker Nocke & Martin Pietz, 2001. "Hyperbolic Discounting and Secondary Markets," Economics Papers 2001-W17, Economics Group, Nuffield College, University of Oxford.
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  14. Luttmer, Erzo G J & Mariotti, Thomas, 2000. "Subjective Discount Factors," CEPR Discussion Papers 2503, C.E.P.R. Discussion Papers.
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