Efficiency and Equilibrium when Preferences are Time-Inconsistent
We consider an exchange economy with time-inconsistent consumers whose preferences are additively separable. When these consumers trade in a sequence of markets, their time-inconsistency may introduce a non-convexity that gives them an incentive to trade lotteries. If there are many consumers, competitive equilibria with and without lotteries exist. The existence of symmetric equilibria may require lotteries. Symmetric equilibria that do not require lotteries are generically locally unique. Allocations that are Pareto efficient at the initial date are also renegotiation-proof. Competitive equilibria are Pareto efficient in this sense, and for generic endowments, if and only if preferences are locally homothetic. For non-homothetic preferences, the introduction of lottery markets has an ambiguous impact on the equilibrium welfare of consumers at the initial date.
|Date of creation:||Jan 2003|
|Date of revision:|
|Contact details of provider:|| Web page: http://sticerd.lse.ac.uk/_new/publications/default.asp|
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.:
- Faruk Gul & Wolfgang Pesendorfer, 2004.
"Self-Control and the Theory of Consumption,"
Econometric Society, vol. 72(1), pages 119-158, 01.
- E. S. Phelps & R. A. Pollak, 1968. "On Second-Best National Saving and Game-Equilibrium Growth," Review of Economic Studies, Oxford University Press, vol. 35(2), pages 185-199.
- Bezalel Peleg & Menahem E. Yaari, 1973. "On the Existence of a Consistent Course of Action when Tastes are Changing," Review of Economic Studies, Oxford University Press, vol. 40(3), pages 391-401.
- R. A. Pollak, 1968. "Consistent Planning," Review of Economic Studies, Oxford University Press, vol. 35(2), pages 201-208.
- Krusell, Per & Kuruscu, Burhanettin & Smith, Anthony Jr., 2002.
"Equilibrium Welfare and Government Policy with Quasi-geometric Discounting,"
Journal of Economic Theory,
Elsevier, vol. 105(1), pages 42-72, July.
- Krusell, Per & Kuruscu, Burhanettin & Smith Jr., Anthony A, 2001. "Equilibrium Welfare and Government Policy with Quasi-Geometric Discounting," CEPR Discussion Papers 2693, C.E.P.R. Discussion Papers.
- Per Krusell & Burhanettin Kuruscu & Anthony A. Smith Jr., 2001. "Equilibrium Welfare and Government Policy with Quasi-Geometric Discounting," Temi di discussione (Economic working papers) 413, Bank of Italy, Economic Research and International Relations Area.
- Per Krusell & Burhanettin Kuruscu & Anthony A. Smtih, Jr., . "Equilibrium Welfare and Government Policy with Quasi-Geometric Discounting," GSIA Working Papers 2001-06, Carnegie Mellon University, Tepper School of Business.
- 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.
- David Laibson, 1997.
"Golden Eggs and Hyperbolic Discounting,"
The Quarterly Journal of Economics,
Oxford University Press, vol. 112(2), pages 443-478.
- Christopher Harris & David Laibson, 1999.
"Dynamic Choices of Hyperbolic Consumers,"
Harvard Institute of Economic Research Working Papers
1886, Harvard - Institute of Economic Research.
- Erzo G. J. Luttmer & Thomas Mariotti, 2003. "Subjective Discounting in an Exchange Economy," Journal of Political Economy, University of Chicago Press, vol. 111(5), pages 959-989, October.
- 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.
- Joseph E. Stiglitz, 1982. "The Inefficiency of the Stock Market Equilibrium," Review of Economic Studies, Oxford University Press, vol. 49(2), pages 241-261.
- K. J. Arrow, 1964. "The Role of Securities in the Optimal Allocation of Risk-bearing," Review of Economic Studies, Oxford University Press, vol. 31(2), pages 91-96.
- Juan D. Carrillo & Thomas Mariotti, 2000. "Strategic Ignorance as a Self-Disciplining Device," Review of Economic Studies, Oxford University Press, vol. 67(3), pages 529-544.
- Kehoe, Timothy J. & Levine, David K. & Prescott, Edward C., 2002.
"Lotteries, Sunspots, and Incentive Constraints,"
Journal of Economic Theory,
Elsevier, vol. 107(1), pages 39-69, November.
- Milton Friedman & L. J. Savage, 1948. "The Utility Analysis of Choices Involving Risk," Journal of Political Economy, University of Chicago Press, vol. 56, pages 279.
When requesting a correction, please mention this item's handle: RePEc:cep:stitep:446. 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: ()
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.