Time-inconsistent preferences, investment and asset pricing

Bo Liu, Lei Lu, Congming Mu and Jinqiang Yang

Economics Letters, 2016, vol. 148, issue C, 48-52

Abstract: In this paper, we present a production-based asset pricing model in which agents have time-inconsistent preferences. We find that the time-inconsistent preferences lead to under-investment, over-consumption, and higher interest rate. These variables are distorted more in the economy with naive agent than the economy with sophisticated agent. In particular, the sophisticated agent invests more and consumes less than the naive agent, but invests less and consumes more than the time-consistent agent. The interest rate in the sophisticated agent economy is lower than that in the naive agent economy, but higher than that in the time-consistent agent economy.

Keywords: Time-inconsistent preferences; Investment; Consumption; Interest rate (search for similar items in EconPapers)
JEL-codes: C73 D92 G11 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:148:y:2016:i:c:p:48-52

DOI: 10.1016/j.econlet.2016.09.015

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