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Non-Existence of Competitive Equilibria with Dynamically Inconsistent Preferences

  • Gabrieli, Tommaso

    (Department of Economics, City University London and Institute of Economic Policy Catholic University of Milan)

  • Ghosal, Sayantan

    (Department of Economics, University of Warwick)

This paper shows the robust non existence of competitive equilibria even in a simple three period representative agent economy with dynamically inconsistent preferences. We distinguish between a sophisticated and naive representative agent. Even when underlying preferences are monotone and convex, we show by example that the induced preferences, at given prices, of the sophisticated representative agent over choices in first period markets are both non convex and satiated. Therefore, even allowing for negative prices, the market clearing allocation is not contained in the convex hull of demand. Finally, with a naive representative agent, we show that perfect foresight is incompatible with market clearing and individual optimization at given prices.

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Paper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 900.

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Date of creation: 2009
Date of revision:
Handle: RePEc:wrk:warwec:900
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  1. Erzo Luttmer & Thomas Mariotti, 2006. "Competitive equilibrium when preferences change over time," Economic Theory, Springer, vol. 27(3), pages 679-690, 04.
  2. Steven M. Goldman, 1980. "Consistent Plans," Review of Economic Studies, Oxford University Press, vol. 47(3), pages 533-537.
  3. Erzo G J Luttmer & Thomas Mariotti, 2003. "Efficiency and Equilibrium when Preferences are Time-Inconsistent," STICERD - Theoretical Economics Paper Series 446, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  4. Murty, K N, 1982. "Theoretical Restrictions on the Parameters of Indirect Addilog Demand Equations-A Comment," Econometrica, Econometric Society, vol. 50(1), pages 225-27, January.
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  6. 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).
  7. repec:tpr:qjecon:v:112:y:1997:i:2:p:443-77 is not listed on IDEAS
  8. Laibson, David I., 1997. "Golden Eggs and Hyperbolic Discounting," Scholarly Articles 4481499, Harvard University Department of Economics.
  9. 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.
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  11. Harris, Christopher & Laibson, David, 2001. "Dynamic Choices of Hyperbolic Consumers," Econometrica, Econometric Society, vol. 69(4), pages 935-57, July.
  12. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680, July.
  13. repec:oup:qjecon:v:112:y:1997:i:2:p:443-77 is not listed on IDEAS
  14. Bezalel Peleg & Menahem E. Yaari, 1973. "On the Existence of a Consistent Course of Action when Tastes are Changing," Review of Economic Studies, Oxford University Press, vol. 40(3), pages 391-401.
  15. Andrew Caplin & John Leahy, 2001. "Psychological Expected Utility Theory and Anticipatory Feelings," The Quarterly Journal of Economics, Oxford University Press, vol. 116(1), pages 55-79.
  16. Caplin, Andrew & Leahy, John, 2006. "The recursive approach to time inconsistency," Journal of Economic Theory, Elsevier, vol. 131(1), pages 134-156, November.
  17. 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.
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