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Efficiency and equilibrium when preferences are time-inconsistent

  • Luttmer, Erzo G.J.
  • Mariotti, Thomas

We consider an exchange economy with time-inconsistent consumers whose preferences are additively separable. When these consumers trade in a sequence of markets, their time-inconsistency may introduce a non-convexity that gives them an incentive to trade lotteries. If there are many consumers, competitive equilibria with and without lotteries exist. The existence of symmetric equilibria may require lotteries. Symmetric equilibria that do not require lotteries are generically locally unique. Allocations that are Pareto efficient at the initial date are also renegotiation-proof. Competitive equilibria are Pareto efficient in this sense, and for generic endowments, if and only if preferences are locally homothetic. For non-homothetic preferences, the introduction of lottery markets has an ambiguous impact on the equilibrium welfare of consumers at the initial date.

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Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 132 (2007)
Issue (Month): 1 (January)
Pages: 493-506

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Handle: RePEc:eee:jetheo:v:132:y:2007:i:1:p:493-506
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622869

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  1. Narayana R. Kocherlakota., 2001. "Looking for evidence of time-inconsistent preferences in asset market data," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 13-24.
  2. Krusell, Per & Kuruscu, Burhanettin & Smith Jr., Anthony A, 2001. "Equilibrium Welfare and Government Policy with Quasi-Geometric Discounting," CEPR Discussion Papers 2693, C.E.P.R. Discussion Papers.
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  8. Carrillo, Juan D & Mariotti, Thomas, 2000. "Strategic Ignorance as a Self-Disciplining Device," Review of Economic Studies, Wiley Blackwell, vol. 67(3), pages 529-44, July.
  9. 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.
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