Saving and Dissaving with Hyperbolic Discounting

Iván Werning and Dan Cao
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Dan Cao: Georgetown University

No 1318, 2017 Meeting Papers from Society for Economic Dynamics

Abstract: We study Markov equilibria in the standard time-inconsistent hyperbolic discounting model set in discrete-time. We provide simple conditions under which all Markov equilibria feature saving or dissaving globally, for all wealth levels. Moreover, we show that whether the agent saves or dissaves depends on comparing the interest rate to a threshold made up of impatience parameters only. Our results provide a prediction for behavior that is robust across Markov equilibria and illustrate a well- behaved side of the model. As a corollary, we overturn indeterminacy concerns in Krusell and Smith (2003), showing that the constructions offered there are not Markov equilibria in the standard hyperbolic model. Indeed, our results can be interpreted as establishing that, whether or not the equilibrium is unique, qualitative savings behavior is uniquely determined. Similar results are likely to obtain in other dynamic games, such as in political economy models of public debt.

Date: 2017
New Economics Papers: this item is included in nep-dge and nep-mic
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Citations: View citations in EconPapers (7)

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Working Paper: Saving and Dissaving with Hyperbolic Discounting (2018)
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