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Dynamic choices of hyperbolic consumers: the continuous time case

Author

Listed:
  • Ivar Ekeland
  • Lazrak Ali

    () (Sauder school of business university of british columbia)

Abstract

This paper characterizes the set of differentiable subgame perfect equilibria in a continuous time intertemporal decision optimization problem with non-constant discounting. The idea of an infinitesimal self is formalized and the equilibrium characterization takes the form of an integral equation (IE) which is reminiscent of the Hamilton-Jacobi-Bellman equation. Beginning with a local existence proof of IE, we analyze some equilibria of the consumption saving problem. We then use the equation IE to suggest a critical indeterminacy in the Ramsey growth model with non-constant discounting

Suggested Citation

  • Ivar Ekeland & Lazrak Ali, 2006. "Dynamic choices of hyperbolic consumers: the continuous time case," 2006 Meeting Papers 822, Society for Economic Dynamics.
  • Handle: RePEc:red:sed006:822
    as

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    File URL: http://repec.org/sed2006/up.8429.1140050923.pdf
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    References listed on IDEAS

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    1. R. A. Pollak, 1968. "Consistent Planning," Review of Economic Studies, Oxford University Press, vol. 35(2), pages 201-208.
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    4. Laibson, David, 1998. "Life-cycle consumption and hyperbolic discount functions," European Economic Review, Elsevier, vol. 42(3-5), pages 861-871, May.
    5. Per Krusell & Anthony A. Smith, Jr., 2003. "Consumption--Savings Decisions with Quasi--Geometric Discounting," Econometrica, Econometric Society, vol. 71(1), pages 365-375, January.
    6. 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.
    7. George Loewenstein & Drazen Prelec, 1992. "Anomalies in Intertemporal Choice: Evidence and an Interpretation," The Quarterly Journal of Economics, Oxford University Press, vol. 107(2), pages 573-597.
    8. Xavier Sala-I-Martin, 1997. "Transfers, Social Safety Nets, and Economic Growth," IMF Staff Papers, Palgrave Macmillan, vol. 44(1), pages 81-102, March.
    9. David Laibson, 1997. "Golden Eggs and Hyperbolic Discounting," The Quarterly Journal of Economics, Oxford University Press, vol. 112(2), pages 443-478.
    10. Arthur J. Robson & Philip J. Reny, 2002. "Existence of subgame perfect equilibrium with public randomization: A short proof," Economics Bulletin, AccessEcon, vol. 3(24), pages 1-8.
    11. 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.
    12. Shane Frederick & George Loewenstein & Ted O'Donoghue, 2002. "Time Discounting and Time Preference: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 40(2), pages 351-401, June.
    13. 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.
    14. Harris, Christopher & Reny, Philip & Robson, Arthur, 1995. "The Existence of Subgame-Perfect Equilibrium in Continuous Games with Almost Perfect Information: A Case for Public Randomization," Econometrica, Econometric Society, vol. 63(3), pages 507-544, May.
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    More about this item

    Keywords

    Hyperbolic discount; consumption saving decision; growth theory;

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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