A Time-Inconsistent Equilibrium Model

Tomas Bjork, Mariana Khapko () and Agatha Murgoci ()
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Mariana Khapko: University of Toronto
Agatha Murgoci: Ørsted

Chapter Chapter 10 in Time-Inconsistent Control Theory with Finance Applications, 2021, pp 101-107 from Springer

Abstract: Abstract In this chapter we consider the equilibrium model from Chap. 4 , which is a discrete-time simplified version of the Cox–Ingersoll–Ross type of economy. We now assume, however, that the representative agent has time-inconsistent preferences. The time inconsistency enters the problem via time- and state-dependence of the agent’s utility function. Loosely speaking, when standing today and making decisions about the future, the preference ordering of the decision maker is allowed to depend on the current state and the current time. In this setting we study both the agent’s problem (intrapersonal equilibrium) and the pricing implications (market equilibrium).

Date: 2021
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DOI: 10.1007/978-3-030-81843-2_10

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