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Consumption Savings Decisions with Quasi-Geometric Discounting

  • Per Krusell
  • Anthony A Smith, Jr.

How do individuals with time-inconsistent preferences make consumption-savings decisions? We try to answer this question by considering the simplest possible form of consumption-savings problem, assuming that discounting is quasi-geometric. A solution to the decision problem is then a subgame-perfect equilibrium of a dynamic game between the individual's ‘successive selves’. When the time horizon is finite, our question has a well-defined answer in terms of primitives. When the time horizon is infinite, we are left without a sharp answer: we cannot rule out the possibility that two identical individuals in the exact same situation make different decisions! In particular, there is a continuum of dynamic equilibria even if we restrict attention to equilibria where current consumption decisions depend only on current wealth.

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Paper provided by in its series NajEcon Working Paper Reviews with number 625018000000000251.

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Date of creation: 02 Oct 2001
Date of revision:
Handle: RePEc:cla:najeco:625018000000000251
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  1. Per Krusell & Jose-Victor Rios-Rull, 1997. "On the size of U.S. government: political economy in the neoclassical growth model," Staff Report 234, Federal Reserve Bank of Minneapolis.
  2. Asheim, Geir B, 1997. "Individual and Collective Time-Consistency," Review of Economic Studies, Wiley Blackwell, vol. 64(3), pages 427-43, July.
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  1. Quantitative Macroeconomics and Real Business Cycles (QM&RBC)

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