Dynamic Savings Choices with Disagreements

Dan Cao () and Iván Werning

No 22007, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study a flexible dynamic savings game in continuous time, where decision makers rotate in and out of power. These agents value spending more highly while in power creating a time-inconsistency problem. We provide a sharp characterization of Markov equilibria. Our analysis proceeds by construction and isolates the importance of a local disagreement index, `beta(c)`, defined as the ratio of marginal utility for those in and out of power. If disagreement is constant the model specializes to hyperbolic discounting. We also provide novel results for this case, offering a complete and simple characterization of equilibria. For the general model we shoe that dissaving occurs when disagreements are sufficiently high, while saving occurs when disagreements are sufficiently low. When disagreements vary sufficiently with spending, richer dynamics are possible. We provide conditions for continuous equilibria and also show that the model can be inverted for primitives that support any smooth consumption function. Our framework applies to individuals under a behavioral interpretation or to governments under a political-economy interpretation.

JEL-codes: C61 C62 C71 C73 D31 D91 H31 I3 O12 (search for similar items in EconPapers)
Date: 2016-02
New Economics Papers: this item is included in nep-mic
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