Time-inconsistent Preferences in General Equilibrium

P. Jean-Jacques Herings () and Kirsten I.M. Rohde

No 56, Research Memoranda from Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization

Abstract: There is a growing body of research in economics that studies the consequences of time-inconsistent preferences. This paper introduces time-inconsistent preferences in a general equilibrium setting. We discuss how the standard notion of competitive equilibrium should be extended in order to allow for changes in intertemporal preferences. Depending on whether or not agents recognize that their intertemporal preferences change, agents are called sophisticated or naïve. We present competitive equilibrium notions for economies with naïve agents and economies with sophisticated agents and provide assumptions under which both types of equilibria exist. Time-inconsistency also raises conceptual issues on the appropriate notion of efficiency. Of particular importance is the way future intertemporal preferences are taken into account. An example shows that sophisticated equilibria may be less efficient than naïve equilibria. We specify suitable conditions for which both types of equilibria satisfy appropriate efficiency notions.

Keywords: Economics (search for similar items in EconPapers)
Date: 2003

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Persistent link: http://EconPapers.repec.org/RePEc:dgr:umamet:2003056

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