Subjective Discount Factors

Thomas Mariotti and Erzo Luttmer

No 2503, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This paper describes the equilibrium of a discrete-time exchange economy in which consumers with arbitrary subjective discount factors and quasi-homothetic period utility functions follow linear Markov consumption and portfolio strategies. Explicit expressions are given for state prices and consumption-wealth ratios. If utility is logarithmic or endowment growth is i.i.d., then this economy is observationally equivalent to one in which consumers discount geometrically. We provide analytically convenient continuous-time approximations and examine the effects of non-geometric subjective discount factors in an economy in which log endowments are subject to temporary and permanent shocks that are governed by a Feller (1951) square-root process. Hyperbolic and quasi-hyperbolic discount factors can significantly increase the volatility of aggregate wealth and raise the expected excess return on aggregate wealth.

Keywords: Hyperbolic discounting; General equilibrium; Asset pricing; Consumption-wealth ratios; Volatility (search for similar items in EconPapers)
JEL-codes: D50 D91 G12 (search for similar items in EconPapers)
Date: 2000-07
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Citations: View citations in EconPapers (2)

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