COMPLEX DYNAMICS IN LUCAS’ TREE ASSET PRICING MODEL WITH DYNAMIC SELF-CONTROL PREFERENCES

Marco Airaudo

Macroeconomic Dynamics, 2021, vol. 25, issue 7, 1755-1778

Abstract: This paper studies the global equilibrium dynamics implied by a Lucas’ tree asset pricing model where the representative agent is subject to temptation in consumption choices, and displays dynamic self-control preferences, as defined by Gul and Pesendorfer [(2004) Econometrica 72, 119–158.]. It shows that endogenous cycles of period 2 and higher, as well as chaotic dynamics exist provided temptation utility is sufficiently important (with respect to standard commitment utility) and sufficiently convex. For parameterizations leading to complex deterministic dynamics, a stochastic version of the model admits rational expectations equilibria displaying excess volatility with respect to the underlying fundamentals.

Date: 2021
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