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A consumption–investment problem with heterogeneous discounting

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  • de-Paz, Albert
  • Marín-Solano, Jesús
  • Navas, Jorge

Abstract

We analyze a stochastic continuous time model in finite horizon in which the agent discounts the instantaneous utility function and the final function at constant but different discount rates of time preference. Within this framework we can model problems in which, when the time t approaches to the final time, the valuation of the final function increases compared with previous valuations. We study a consumption and portfolio rules problem for CRRA and CARA utility functions for time-consistent agents, and we compare the different equilibria with the time-inconsistent solutions. The introduction of random terminal time is also discussed. Differences with both the mathematical treatment and agent’s behavior in the case of hyperbolic discounting are stressed.

Suggested Citation

  • de-Paz, Albert & Marín-Solano, Jesús & Navas, Jorge, 2013. "A consumption–investment problem with heterogeneous discounting," Mathematical Social Sciences, Elsevier, vol. 66(3), pages 221-232.
    • Handle: RePEc:eee:matsoc:v:66:y:2013:i:3:p:221-232
    DOI: 10.1016/j.mathsocsci.2013.05.001
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    References listed on IDEAS

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    Cited by:

    1. Peng, Ling & Kloeden, Peter E., 2021. "Time-consistent portfolio optimization," European Journal of Operational Research, Elsevier, vol. 288(1), pages 183-193.
    2. Carles Mañó-Cabello & Jesús Marín-Solano & Jorge Navas, 2021. "A Resource Extraction Model with Technology Adoption under Time Inconsistent Preferences," Mathematics, MDPI, vol. 9(18), pages 1-24, September.
    3. Ekaterina Gromova & Anastasiia Zaremba & Shimai Su, 2021. "Time-Consistency of an Imputation in a Cooperative Hybrid Differential Game," Mathematics, MDPI, vol. 9(15), pages 1-14, August.
    4. de-Paz, Albert & Marín-Solano, Jesús & Navas, Jorge & Roch, Oriol, 2014. "Consumption, investment and life insurance strategies with heterogeneous discounting," Insurance: Mathematics and Economics, Elsevier, vol. 54(C), pages 66-75.

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