Continuous Markov equilibria with quasi-geometric discounting

Satyajit Chatterjee () and Burcu Eyigungor

No 14-6, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: We prove that the standard quasi-geometric discounting model used in dynamic consumer theory and political economics does not possess continuous Markov perfect equilibria (MPE) if there is a strictly positive lower bound on wealth. We also show that, at points of discontinuity, the decision maker strictly prefers lotteries over the next period's assets. We then extend the standard model to have lotteries and establish the existence of an MPE with continuous decision rules. The models with and without lotteries are numerically compared, and it is shown that the model with lotteries behaves more in accord with economic intuition.

Keywords: Quasi-geometric; Quasi-hyperbolic; Time consistency; 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)
Pages: 53 pages
Date: 2014-02-27
New Economics Papers: this item is included in nep-dge and nep-mac
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Continuous Markov equilibria with quasi-geometric discounting (2016)
Working Paper: Continuous Markov Equilibria with Quasi-Geometric Discounting (2014)
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