Looking for evidence of time-inconsistent preferences in asset market data
This study argues that strong evidence contradicting the traditional assumption of time-consistent preferences is not available. The study builds and analyzes the implications of a deterministic general equilibrium model and compares them to data from the U.S. asset market. The model implies that (1) because of dynamic arbitrage, the prices of retradable assets cannot reveal whether preferences are time-inconsistent; but (2) the prices of commitment assets, investments which must be held for their lifetime, can. These prices will be higher than the present values of their future payoffs only when preferences are time-inconsistent. And (3) when preferences are time-inconsistent, people will not hold both retradable and commitment assets. Empirical observations on two examples of commitment assets—education and individual retirement accounts—are not consistent with these model implications.
Volume (Year): (2001)
Issue (Month): Sum ()
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- Per Krusell & Anthony A. Smith, Jr., . "Consumption-Savings Decisions with Quasi-Geometric Discounting," GSIA Working Papers 2001-05, Carnegie Mellon University, Tepper School of Business.
- Per Krusell & Anthony A Smith, Jr., 2001. "Consumption Savings Decisions with Quasi-Geometric Discounting," NajEcon Working Paper Reviews 625018000000000251, www.najecon.org.
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- Robert J. Barro, 1999. "Ramsey Meets Laibson in the Neoclassical Growth Model," The Quarterly Journal of Economics, Oxford University Press, vol. 114(4), pages 1125-1152.
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