The Neoclassical Growth Model with Time-Inconsistent Decision Making and Perfect Foresight

Kirill Borissov, Mikhail Pakhnin and Ron Wendner

Graz Economics Papers from University of Graz, Department of Economics

Abstract: In this paper, we propose an approach to describe the behavior of na ve agents with quasi-hyperbolic discounting in the neoclassical growth model. To study time-inconsistent decision making of an agent who cannot commit to future actions, we introduce the notion of sliding equilibrium and distinguish between pseudo-perfect foresight and perfect foresight. The agent with pseudo-perfect foresight revises both the consumption path and expectations about prices; the agent with perfect foresight correctly foresees prices in a sliding equilibrium and is naive only about their time inconsistency. We prove the existence of sliding equilibria for the class of isoelastic utility functions and show that generically consumption paths are not the same under quasi-hyperbolic and exponential discounting. Observational equivalence only holds in the well-known cases of a constant interest rate or logarithmic utility. Our results suggest that perfect foresight implies a higher long-run capital stock and consumption level than pseudo-perfect foresight.

Keywords: Quasi-hyperbolic discounting; Observational equivalence; Time inconsistency; Naive agents; Sliding equilibrium; Perfect foresight. (search for similar items in EconPapers)
JEL-codes: D15 D91 E21 O40 (search for similar items in EconPapers)
Date: 2021-08
New Economics Papers: this item is included in nep-cwa, nep-gro, nep-mac and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://unipub.uni-graz.at/obvugrveroeff/download/ ... riginalFilename=true

Related works:
Working Paper: The Neoclassical Growth Model with Time-Inconsistent Decision Making and Perfect Foresight (2021)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:grz:wpaper:2021-08

Ordering information: This working paper can be ordered from
https://repecgrz.uni-graz.at/RePEc/

Access Statistics for this paper

More papers in Graz Economics Papers from University of Graz, Department of Economics University of Graz, Universitaetsstr. 15/F4, 8010 Graz, Austria. Contact information at EDIRC.
Bibliographic data for series maintained by Stefan Borsky ().