Consumption-Savings Decisions with Quasi-Geometric Discounting

Per Krusell and Anthony Smith

No 2001-05, GSIA Working Papers from Carnegie Mellon University, Tepper School of Business

Abstract: How do individuals with time-inconsistent preferences make consumption-savings decisions? We try to answer this question by considering the simplest possible form of consumption-savings problem, assuming that discountingg is quasi-geometric. A solution to the decision problem is then a subgame-perfect equilibrium of a dynamic game between the individual's "successive selves." When the time horizon is finite, our question has a well-defined answer in terms of primitives. When the time horizon is infinite, we are left without a sharp answer: we cannot rule out the possibility that two identical individuals in the exact same situation make different decisions! In particular, there is a continuum of dynamic equilibria even if we restrict attention to equilibria where current consumption decisions depend only on current wealth.

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Related works:
Journal Article: Consumption--Savings Decisions with Quasi--Geometric Discounting (2003)
Working Paper: Consumption Savings Decisions with Quasi-Geometric Discounting (2001)
Working Paper: Consumption Savings Decisions with Quasi-Geometric Discounting (2001)
Working Paper: Consumption-Savings Decisions with Quasi-Geometric Discounting (2001)
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