Heterogeneous discounting in consumption-investment problems. Time consistent solutions
In this paper we analyze a stochastic continuous time model in finite horizon in which agents discount the instantaneous utility function and the final function at constant but different instantaneous discount rates of time preference. Within this context 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 in a way that cannot be explained by using a unique constant or a variable discount rate. We derive a dynamic programming equation whose solutions are time-consistent Markov equilibria. For this class of time preferences, we study the classical consumption and portfolio rules model (Merton, 1971) for CRRA and CARA utility functions for time- consistent agents, and we compare the different equilibria with the time-inconsistent solutions. The introduction of stochastic terminal time is also discussed.
|Date of creation:||2011|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.ere.ub.es
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Shane Frederick & George Loewenstein & Ted O'Donoghue, 2002. "Time Discounting and Time Preference: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 40(2), pages 351-401, June.
- Karp, Larry, 2007.
"Non-constant discounting in continuous time,"
Journal of Economic Theory,
Elsevier, vol. 132(1), pages 557-568, January.
- Karp, Larry, 2004. "Non-constant discounting in continuous time," CUDARE Working Paper Series 0969, University of California at Berkeley, Department of Agricultural and Resource Economics and Policy.
- Karp, Larry, 2005. "Non-Constant Discounting in Continuous Time," Institute for Research on Labor and Employment, Working Paper Series qt0nn1t22z, Institute of Industrial Relations, UC Berkeley.
- Karp, Larry, 2004. "Non-Constant Discounting in Continuous Time," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt7pr05084, Department of Agricultural & Resource Economics, UC Berkeley.
- R. C. Merton, 1970.
"Optimum Consumption and Portfolio Rules in a Continuous-time Model,"
58, Massachusetts Institute of Technology (MIT), Department of Economics.
- Merton, Robert C., 1971. "Optimum consumption and portfolio rules in a continuous-time model," Journal of Economic Theory, Elsevier, vol. 3(4), pages 373-413, December.
When requesting a correction, please mention this item's handle: RePEc:bar:bedcje:2011264. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Espai de Recerca en Economia)
If references are entirely missing, you can add them using this form.