Continuous Markov equilibria with quasi-geometric discounting

Satyajit Chatterjee () and Burcu Eyigungor

Journal of Economic Theory, 2016, vol. 163, issue C, 467-494

Abstract: This paper proves that the standard quasi-geometric discounting model used in dynamic consumer theory and political economics does not possess Markov perfect equilibria (MPE) with continuous decision rules, if there is a strictly positive lower bound on wealth. It is shown that these discontinuities imply that the decision-maker strictly prefers lotteries over next period's assets. An extension with lotteries is presented, and the existence of an MPE with continuous decision rule is established. The models with and without lotteries are numerically compared, and some appealing properties of the lottery-enhanced model are noted.

Keywords: Quasi-geometric; Quasi-hyperbolic; Markov perfect equilibrium; Debt limit; Continuous solutions; Lotteries (search for similar items in EconPapers)
JEL-codes: C73 D11 D90 E21 H63 P16 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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Related works:
Working Paper: Continuous Markov equilibria with quasi-geometric discounting (2014)
Working Paper: Continuous Markov Equilibria with Quasi-Geometric Discounting (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:163:y:2016:i:c:p:467-494

DOI: 10.1016/j.jet.2016.02.009

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