Consumption-Savings Decisions with Quasi-Geometric Discounting
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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- Geir B. Asheim, 1995.
"Individual and Collective Time-Consistency,"
1128, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Asheim, G.B., 1991. "Individual and Collective Time Consistency," Papers 9169, Tilburg - Center for Economic Research.
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- Jose-Victor Rios-Rull & Per Krusell, 1999.
"On the Size of U.S. Government: Political Economy in the Neoclassical Growth Model,"
American Economic Review,
American Economic Association, vol. 89(5), pages 1156-1181, December.
- 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.
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