Discussion Paper Details

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Title: Consumption-Savings Decisions with Quasi-Geometric Discounting

Author(s): Per Krusell and Anthony A Smith Jr.

Publication Date: January 2001

Keyword(s): Indeterminacy, Quasi-Geometric Discounting and Time Inconsistency

Programme Area(s): International Macroeconomics

Abstract: How do individuals with time-inconsistent preferences make consumption-savings decisions? We try to answer this question by considering the simplest possible form of consumption-savings problem, assuming that discounting is quasi-geometric. A solution to the decision problem is then a subgame-perfect equilibrium of a dynamic game between the individual's ?successive selves?. When the time horizon is finite, our question has a well-defined answer in terms of primitives. When the time horizon is infinite, we are left without a sharp answer: we cannot rule out the possibility that two identical individuals in the exact same situation make different decisions! In particular, there is a continuum of dynamic equilibria even if we restrict attention to equilibria where current consumption decisions depend only on current wealth.

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Bibliographic Reference

Krusell, P and Smith Jr., A. 2001. 'Consumption-Savings Decisions with Quasi-Geometric Discounting'. London, Centre for Economic Policy Research.