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Looking for evidence of time-inconsistent preferences in asset market data


  • Narayana R. Kocherlakota


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.

Suggested Citation

  • 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.
  • Handle: RePEc:fip:fedmqr:y:2001:i:sum:p:13-24:n:v.25no.3

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    References listed on IDEAS

    1. Per Krusell & Anthony A. Smith, Jr., 2003. "Consumption--Savings Decisions with Quasi--Geometric Discounting," Econometrica, Econometric Society, vol. 71(1), pages 365-375, January.
    2. Hansen, Lars Peter & Richard, Scott F, 1987. "The Role of Conditioning Information in Deducing Testable," Econometrica, Econometric Society, vol. 55(3), pages 587-613, May.
    3. Card, David, 1999. "The causal effect of education on earnings," Handbook of Labor Economics,in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 30, pages 1801-1863 Elsevier.
    4. Kocherlakota, Narayana R., 1996. "Reconsideration-Proofness: A Refinement for Infinite Horizon Time Inconsistency," Games and Economic Behavior, Elsevier, vol. 15(1), pages 33-54, July.
    5. 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.
    6. David Laibson, 1997. "Golden Eggs and Hyperbolic Discounting," The Quarterly Journal of Economics, Oxford University Press, vol. 112(2), pages 443-478.
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    Cited by:

    1. David K. Backus & Bryan R. Routledge & Stanley E. Zin, 2005. "Exotic Preferences for Macroeconomists," NBER Chapters,in: NBER Macroeconomics Annual 2004, Volume 19, pages 319-414 National Bureau of Economic Research, Inc.
    2. Startz Richard & Tsang Kwok Ping, 2012. "Nonexponential Discounting: A Direct Test And Perhaps A New Puzzle," The B.E. Journal of Macroeconomics, De Gruyter, vol. 12(1), pages 1-35, November.
    3. Luttmer, Erzo G.J. & Mariotti, Thomas, 2007. "Efficiency and equilibrium when preferences are time-inconsistent," Journal of Economic Theory, Elsevier, vol. 132(1), pages 493-506, January.
    4. Kevin X.D. Huang & Zheng Liu & John Qi Zhu, 2015. "Temptation and Self‐Control: Some Evidence and Applications," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(4), pages 581-615, June.
    5. Leeat Yariv, 2004. "Safety in Markets: An Impossibility Theorem for Dutch Books," Theory workshop papers 658612000000000072, UCLA Department of Economics.
    6. Carmona, Guilherme, 2002. "Equilibrium Outcomes in Repeated Two-Person, Zero-Sum Games," FEUNL Working Paper Series wp419, Universidade Nova de Lisboa, Faculdade de Economia.
    7. repec:wsi:ijtafx:v:20:y:2017:i:03:n:s0219024917500170 is not listed on IDEAS
    8. Leeat Yariv & David Laibson, 2004. "Safety in Markets: An Impossibility Theorem for Dutch Books," 2004 Meeting Papers 867, Society for Economic Dynamics.
    9. Noor, Jawwad, 2007. "Commitment and self-control," Journal of Economic Theory, Elsevier, vol. 135(1), pages 1-34, July.
    10. Woźny Łukasz, 2016. "On the Price of Commitment Assets in a General Equilibrium Model with Credit Constraints and Tempted Consumers," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 16(2), pages 579-598, June.
    11. Kannai, Yakar & Selden, Larry & Wei, Xiao, 2014. "Myopic separability," Journal of Economic Behavior & Organization, Elsevier, vol. 103(C), pages 125-144.
    12. Faruk Gul & Wolfgang Pesendorfer, 2004. "Self Control, Revealed Preferences and Consumption Choice," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(2), pages 243-264, April.
    13. Benhabib, Jess & Bisin, Alberto, 2005. "Modeling internal commitment mechanisms and self-control: A neuroeconomics approach to consumption-saving decisions," Games and Economic Behavior, Elsevier, vol. 52(2), pages 460-492, August.


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