DP2651 Consumption-Savings Decisions with Quasi-Geometric Discounting

Author(s): Per Krusell, Anthony A Smith Jr.
Publication Date: January 2001
Keyword(s): Indeterminacy, Quasi-Geometric Discounting, Time Inconsistency
JEL(s): C73, D90, E21
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=2651

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.