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Optimal consumption with time-inconsistent preferences

Author

Listed:
  • Liya Liu

    (Shanghai Institute of International Finance and Economics
    Shanghai University of Finance and Economics)

  • Yingjie Niu

    (Shanghai University of Finance and Economics)

  • Yuanping Wang

    (Shanghai University of Finance and Economics
    Shanxi University of Finance and Economics)

  • Jinqiang Yang

    (Shanghai Institute of International Finance and Economics
    Shanghai University of Finance and Economics)

Abstract

This paper extends the standard continuous-time buffer-stock savings model with borrowing constraints by introducing time-inconsistent agent preferences. Interestingly, it predicts that time-inconsistent preferences will strengthen the consumption motive, and this makes the agent’s borrowing constraints more severe and generates higher MPCs out of liquidity, which provides an alternative explanation for the “excess sensitivity” to liquidity from the perspective of time-inconsistent preferences. Moreover, by incorporating time-inconsistent preferences, our theoretical model also provides support for the empirical evidence of “excess smoothness.”

Suggested Citation

  • Liya Liu & Yingjie Niu & Yuanping Wang & Jinqiang Yang, 2020. "Optimal consumption with time-inconsistent preferences," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 70(3), pages 785-815, October.
    • Handle: RePEc:spr:joecth:v:70:y:2020:i:3:d:10.1007_s00199-019-01228-1
    DOI: 10.1007/s00199-019-01228-1
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    Cited by:

    1. Li, Shilin & Li, Tongtong & Yang, Jinqiang, 2022. "Optimal consumption and portfolio choices in the stochastic SIS model," The North American Journal of Economics and Finance, Elsevier, vol. 63(C).
    2. Shigeta, Yuki, 2022. "Quasi-hyperbolic discounting under recursive utility and consumption–investment decisions," Journal of Economic Theory, Elsevier, vol. 204(C).
    3. Paul Calcott & Vladimir Petkov, 2022. "Excessive consumption and present bias," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 74(1), pages 113-134, July.
    4. Shinsuke Ikeda & Takeshi Ojima, 2021. "Tempting goods, self-control fatigue, and time preference in consumer dynamics," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 72(4), pages 1171-1216, November.
    5. Joydeep Bhattacharya & Monisankar Bishnu & Min Wang, 2023. "Credit Markets with time-inconsistent agents and strategic loan default," Discussion Papers 23-01, Indian Statistical Institute, Delhi.
    6. Li, Yuan & Yang, Jinqiang & Zhao, Siqi, 2022. "Present-biased government and sovereign debt dynamics," Journal of Mathematical Economics, Elsevier, vol. 98(C).
    7. Yanzhao Li & Ju-e Guo & Shaolong Sun & Yongwu Li, 2022. "How time-inconsistent preferences influence venture capital exit decisions? A new perspective for grandstanding," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 8(1), pages 1-24, December.

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    More about this item

    Keywords

    Time-inconsistent preferences; MPC; Excess sensitivity; Excess smoothness;
    All these keywords.

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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