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Equilibrium Welfare and Government Policy with Quasi-Geometric Discounting

  • Per Krusell

    (University of Rochester)

  • Burhanettin Kuruscu

    (University of Rochester)

  • Anthony A. Smith Jr.

    (Carnegie Mellon University)

We consider a representative-agent equilibrium model where the consumer has quasi geometric discounting and cannot commit to future actions. We restrict attention to a parametric class for preferences and technology and solve for time-consistent competitive equilibria globally and explicitly. We then characterize the welfare properties of competitive equilibria and compare them to that of a planning problem. The planner is a consumer representative who, without commitment but in a time-consistent way, maximizes his presentvalue utility subject to resource constraints. The competitive equilibrium results in strictly higher welfare than does the planning problem whenever the discounting is not geometric.

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Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 413.

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Date of creation: Aug 2001
Date of revision:
Handle: RePEc:bdi:wptemi:td_413_01
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  1. Christopher Harris & David Laibson, 1999. "Dynamic Choices of Hyperbolic Consumers," Harvard Institute of Economic Research Working Papers 1886, Harvard - Institute of Economic Research.
  2. W. Pesendorfer & F. Gul, 1999. "Self-Control and the Theory of Consumption," Princeton Economic Theory Papers 99f2, Economics Department, Princeton University.
  3. Per Krusell & Burhanettin Kuruşçu & Anthony A. Smith Jr., 2010. "Temptation and Taxation," Econometrica, Econometric Society, vol. 78(6), pages 2063-2084, November.
  4. Faruk Gul & Wolfgang Pesendorfer, 2001. "Temptation and Self-Control," Econometrica, Econometric Society, vol. 69(6), pages 1403-1435, November.
  5. David I. Laibson & Andrea Repetto & Jeremy Tobacman, 1998. "Self-Control and Saving for Retirement," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(1), pages 91-196.
  6. David I. Laibson, 1996. "Hyperbolic Discount Functions, Undersaving, and Savings Policy," NBER Working Papers 5635, National Bureau of Economic Research, Inc.
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