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Subjective Discount Factors

Author

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  • Luttmer, Erzo G J
  • Mariotti, Thomas

Abstract

This paper describes the equilibrium of a discrete-time exchange economy in which consumers with arbitrary subjective discount factors and quasi-homothetic period utility functions follow linear Markov consumption and portfolio strategies. Explicit expressions are given for state prices and consumption-wealth ratios. If utility is logarithmic or endowment growth is i.i.d., then this economy is observationally equivalent to one in which consumers discount geometrically. We provide analytically convenient continuous-time approximations and examine the effects of non-geometric subjective discount factors in an economy in which log endowments are subject to temporary and permanent shocks that are governed by a Feller (1951) square-root process. Hyperbolic and quasi-hyperbolic discount factors can significantly increase the volatility of aggregate wealth and raise the expected excess return on aggregate wealth.

Suggested Citation

  • Luttmer, Erzo G J & Mariotti, Thomas, 2000. "Subjective Discount Factors," CEPR Discussion Papers 2503, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:2503
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Christopher Harris & David Laibson, 2013. "Instantaneous Gratification," The Quarterly Journal of Economics, Oxford University Press, pages 205-248.
    2. Nocke, Volker & Peitz, Martin, 2003. "Hyperbolic discounting and secondary markets," Games and Economic Behavior, Elsevier, vol. 44(1), pages 77-97, July.

    More about this item

    Keywords

    Asset Pricing; Consumption-Wealth Ratios; General Equilibrium; Hyperbolic Discounting; Volatility;

    JEL classification:

    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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