Short-horizon Duesenberry Equilibrium

Jaime Alberto Londo\~no

Papers from arXiv.org

Abstract: We develop a continuous-time general equilibrium framework for an infinite heterogeneous population whose household types are transported by a Brownian flow. Agents repeatedly solve short-horizon optimization problems over state-price-discounted consumption and wealth, which admit an endogenous relative-income criterion in equilibrium. For the resulting Radner-type equilibrium---a short-horizon Duesenberry equilibrium---we obtain a complete characterization and an existence theorem; market completeness and the absence of state-tame arbitrage emerge endogenously from market clearing. Finally, the equity premium puzzle is shifted to a question about the volatility of aggregate total wealth, while the risk-free rate puzzle admits a plausible resolution.

Date: 2026-03, Revised 2026-08
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