General equilibrium and dynamic inconsistency

Kirill Borissov, Mikhail Pakhnin and Ron Wendner

Journal of Mathematical Economics, 2024, vol. 114, issue C

Abstract: We study the role of different sources of naivete in a general equilibrium version of the Ramsey model with quasi-hyperbolic discounting. When agents are aware of others’ naivete, as strongly suggested by empirical evidence, they revise consumption paths, correctly anticipating prices in a resulting sliding equilibrium (perfect foresight). When agents are unaware of others’ naivete, as is typically assumed in the theoretical literature, they revise both consumption paths and price expectations (quasi-perfect foresight). We prove the existence of sliding equilibrium under perfect foresight for the class of isoelastic utility functions. We show that generically quasi-hyperbolic discounting matters for saving behavior: sliding equilibrium under perfect foresight is observationally equivalent to some optimal path in the standard Ramsey model only if utility is logarithmic. By comparing sliding equilibria under different types of foresight we show that perfect foresight implies a higher saving rate, long-run capital stock and consumption level than quasi-perfect foresight.

Keywords: Quasi-hyperbolic discounting; Time inconsistency; Sliding equilibrium; Naivete; Perfect foresight; Observational equivalence (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (1)

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Related works:
Working Paper: General Equilibrium and Dynamic Inconsistency (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:mateco:v:114:y:2024:i:c:s0304406824000843

DOI: 10.1016/j.jmateco.2024.103024

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