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Time-inconsistent Preferences in a General Equilibrium Model

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  • Herings Jean-Jacques
  • Rohde Kirsten I.M.

    (METEOR)

Abstract

This paper introduces time-inconsistent preferences in a multi-commodity general equilibrium framework with incomplete markets. The standard concept of competitive equilibrium is extended in order to allow for changes in intertemporal preferences. Depending on whether or not agents recognize that their intertemporal preferences change, agents are called sophisticated or naïve. This paper presents competitive equilibrium notions for economies with naïve agents and economies with sophisticated agents and provides assumptions under which both types of equilibria exist. Surprisingly, the set of naïve equilibria of societies populated by time-consistent households is not allocationally equivalent to the set of competitive equilibria. For sophisticated equilibria, the equivalence holds. Time-inconsistency also raises conceptual issues about the appropriate concept of efficiency. Choices have to be made concerning the incorporation of future preferences and the appropriate instruments to create Pareto improvements. For both naïve and sophisticated societies, we present four possible efficiency concepts. Suitable conditions are specified for which both naïve and sophisticated equilibria satisfy appropriate efficiency concepts.

Suggested Citation

  • Herings Jean-Jacques & Rohde Kirsten I.M., 2004. "Time-inconsistent Preferences in a General Equilibrium Model," Research Memorandum 016, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  • Handle: RePEc:unm:umamet:2004016
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    References listed on IDEAS

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    1. Hoch, Stephen J & Loewenstein, George F, 1991. " Time-Inconsistent Preferences and Consumer Self-Control," Journal of Consumer Research, Oxford University Press, vol. 17(4), pages 492-507, March.
    2. Dutta, Jayasri & Morris, Stephen, 1997. "The Revelation of Information and Self-Fulfilling Beliefs," Journal of Economic Theory, Elsevier, vol. 73(1), pages 231-244, March.
    3. Atsushi Kajii & Antonio Villanacci & Alessandro Citanna, 1998. "Constrained suboptimality in incomplete markets: a general approach and two applications," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 11(3), pages 495-521.
    4. 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.
    5. 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.
    6. 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.
    7. David Laibson, 1997. "Golden Eggs and Hyperbolic Discounting," The Quarterly Journal of Economics, Oxford University Press, vol. 112(2), pages 443-478.
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    Cited by:

    1. Cingiz, Kutay & Flesch, János & Herings, P. Jean-Jacques & Predtetchinski, Arkadi, 2016. "Doing it now, later, or never," Games and Economic Behavior, Elsevier, vol. 97(C), pages 174-185.
    2. David Laibson, 1997. "Golden Eggs and Hyperbolic Discounting," The Quarterly Journal of Economics, Oxford University Press, vol. 112(2), pages 443-478.
    3. Dziewulski, Paweł, 2015. "Efficiency of competitive equilibria in economies with time-dependent preferences," Journal of Economic Theory, Elsevier, vol. 159(PA), pages 311-325.
    4. Gerber, Anke & Rohde, Kirsten I.M., 2010. "Risk and preference reversals in intertemporal choice," Journal of Economic Behavior & Organization, Elsevier, vol. 76(3), pages 654-668, December.
    5. Tommaso Gabrieli & Sayantan Ghosal, 2013. "Non-existence of competitive equilibria with dynamically inconsistent preferences," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 52(1), pages 299-313, January.
    6. repec:eee:matsoc:v:87:y:2017:i:c:p:40-54 is not listed on IDEAS
    7. Arno Riedl, 2009. "Behavioral and Experimental Economics Can Inform Public Policy: Some Thoughts," CESifo Working Paper Series 2902, CESifo Group Munich.
    8. P. Herings & Kirsten Rohde, 2008. "On the completeness of complete markets," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 37(2), pages 171-201, November.
    9. Rohde Kirsten I.M., 2005. "A Reason for Sophisticated Investors not to seize Arbitrage Opportunities in Markets without Frictions," Research Memorandum 053, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
    10. Anke Gerbe & Kirsten I.M. Rohde, 2010. "Risk and Preference Reversals in Intertemporal Choice," Post-Print hal-00911832, HAL.
    11. Jean-Pierre Drugeon & Bertrand Wigniolle, 2017. "On Time-Consistent Collective Choice with Heterogeneous Quasi- Hyperbolic Discounting," PSE Working Papers halshs-01662833, HAL.
    12. Peeters R.J.A.P. & Méder Z.Z. & Flesch J., 2014. "Naiveté and sophistication in dynamic inconsistency," Research Memorandum 005, Maastricht University, Graduate School of Business and Economics (GSBE).

    More about this item

    Keywords

    microeconomics ;

    JEL classification:

    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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