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Continuous Markov Equilibria with Quasi-Geometric Discounting

Author

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  • Burcu Eyigungor

    (Federal Reserve Bank of Philadelphia)

  • Satyajit Chatterjee

    (Federal Reserve Bank of Philadelphia)

Abstract

We prove that the standard quasi-geometric discounting model used in dynamic consumer theory and political economics does not possess continuous Markov Perfect equilibria if there is a strictly positive lower bound on wealth. We also show that at points of discontinuity, the decision maker strictly prefers lotteries over next period's assets. We then extend the standard model to have lotteries and establish the existence of a MPE with continuous decision rules. The model with and without lotteries are numerically compared and it is shown that the model with lotteries behaves more in accord with economic intuition.

Suggested Citation

  • Burcu Eyigungor & Satyajit Chatterjee, 2014. "Continuous Markov Equilibria with Quasi-Geometric Discounting," 2014 Meeting Papers 348, Society for Economic Dynamics.
  • Handle: RePEc:red:sed014:348
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    References listed on IDEAS

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    Cited by:

    1. Marco Bassetto & Jose-Victor Rios-Rull & Zhen Huo, 2018. "Organizational Equilibrium with Capital," Working Paper Series WP-2018-20, Federal Reserve Bank of Chicago, revised 30 Nov 2018.
    2. Balbus, Łukasz & Reffett, Kevin & Woźny, Łukasz, 2018. "On uniqueness of time-consistent Markov policies for quasi-hyperbolic consumers under uncertainty," Journal of Economic Theory, Elsevier, vol. 176(C), pages 293-310.
    3. Lilia Maliar & Serguei Maliar, 2016. "Ruling Out Multiplicity of Smooth Equilibria in Dynamic Games: A Hyperbolic Discounting Example," Dynamic Games and Applications, Springer, vol. 6(2), pages 243-261, June.
    4. Chatterjee, Satyajit & Eyigungor, Burcu, 2019. "Endogenous political turnover and fluctuations in sovereign default risk," Journal of International Economics, Elsevier, vol. 117(C), pages 37-50.
    5. Dan Cao & Iván Werning, 2016. "Dynamic Savings Choices with Disagreements," NBER Working Papers 22007, National Bureau of Economic Research, Inc.
    6. Yun Pei & Zoe Xie, 2016. "A Quantitative Theory of Time-Consistent Unemployment Insurance," FRB Atlanta Working Paper 2016-11, Federal Reserve Bank of Atlanta, revised 01 Dec 2017.

    More about this item

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • P16 - Economic Systems - - Capitalist Systems - - - Political Economy of Capitalism

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