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Hyperbolic Discounting and Secondary Markets

  • Volker Nocke

    ()

    (Nuffield College, Oxford)

  • Martin Pietz

    ()

    (Temporary Address: Fundamentos Analisis Economico, Universidad de Alicante)

We study the effect of hyperbolic discounting on competitive equilibria in secondary markets for a durable good. Under exponential discounting, secondary markets are irrelevant in our model. They do not affect the price in the initial period and are neutral to the allocation. Under hyperbolic discounting, secondary markets are not neutral: they do affect price and allocation. The price in the unique competitive Markov equilibrium is lower than the price in the absence of secondary markets. This affects the equilibrium supply of the durable good in the initial period. We characterise all stationary competitive equilibria in terms of prices. In particular, we obtain that there are stationary competitive equilibria in which trade occurs in each period and the allocation of the durable good is inefficient. Furthermore, we show that there exist competitive equilibria with increasing, decreasing, and cycling price paths, despite the stationarity of the market environment.

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File URL: http://www.nuff.ox.ac.uk/Economics/papers/2001/w17/secondnewh.pdf
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Paper provided by Economics Group, Nuffield College, University of Oxford in its series Economics Papers with number 2001-W17.

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Length: 37 pages
Date of creation: 12 Dec 2001
Date of revision:
Handle: RePEc:nuf:econwp:0117
Contact details of provider: Web page: http://www.nuff.ox.ac.uk/economics/

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  1. Ted O'Donoghue and Matthew Rabin ., 1997. "Doing It Now or Later," Economics Working Papers 97-253, University of California at Berkeley.
  2. Volker Nocke & Martin Peitz, 2002. "Hyperbolic Discounting and Secondary Markets," Economics Series Working Papers 2001-W17, University of Oxford, Department of Economics.
  3. W. Pesendorfer & F. Gul, 1999. "Temptation and Self-Control," Princeton Economic Theory Papers 99f1, Economics Department, Princeton University.
  4. Ted O'Donoghue & Matthew Rabin, 1999. "Incentives For Procrastinators," The Quarterly Journal of Economics, MIT Press, vol. 114(3), pages 769-816, August.
  5. Harris, Christopher & Laibson, David, 2001. "Dynamic Choices of Hyperbolic Consumers," Econometrica, Econometric Society, vol. 69(4), pages 935-57, July.
  6. Gul, Faruk & Sonnenschein, Hugo & Wilson, Robert, 1986. "Foundations of dynamic monopoly and the coase conjecture," Journal of Economic Theory, Elsevier, vol. 39(1), pages 155-190, June.
  7. Ted O' Donoghue and Matthew Rabin., 2000. "Choice and Procrastination," Economics Working Papers E00-281, University of California at Berkeley.
  8. Akerlof, George A, 1991. "Procrastination and Obedience," American Economic Review, American Economic Association, vol. 81(2), pages 1-19, May.
  9. Luttmer, Erzo G J & Mariotti, Thomas, 2000. "Subjective Discount Factors," CEPR Discussion Papers 2503, C.E.P.R. Discussion Papers.
  10. Carrillo, Juan D & Mariotti, Thomas, 2000. "Strategic Ignorance as a Self-Disciplining Device," Review of Economic Studies, Wiley Blackwell, vol. 67(3), pages 529-44, July.
  11. Laibson, David I., 1997. "Golden Eggs and Hyperbolic Discounting," Scholarly Articles 4481499, Harvard University Department of Economics.
  12. Fudenberg, Drew & Maskin, Eric, 1986. "The Folk Theorem in Repeated Games with Discounting or with Incomplete Information," Econometrica, Econometric Society, vol. 54(3), pages 533-54, May.
  13. Brocas, Isabelle & Carrillo, Juan D, 1999. "On Rush and Procrastination," CEPR Discussion Papers 2237, C.E.P.R. Discussion Papers.
  14. Nancy L. Stokey, 1981. "Rational Expectations and Durable Goods Pricing," Bell Journal of Economics, The RAND Corporation, vol. 12(1), pages 112-128, Spring.
  15. Thaler, Richard, 1981. "Some empirical evidence on dynamic inconsistency," Economics Letters, Elsevier, vol. 8(3), pages 201-207.
  16. Bulow, Jeremy I, 1982. "Durable-Goods Monopolists," Journal of Political Economy, University of Chicago Press, vol. 90(2), pages 314-32, April.
  17. Loewenstein, George & Prelec, Drazen, 1992. "Anomalies in Intertemporal Choice: Evidence and an Interpretation," The Quarterly Journal of Economics, MIT Press, vol. 107(2), pages 573-97, May.
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