What is the characterization of asset prices and investor’s behavior under time-inconsistent preferences? This paper investigates the characterization of financial market equilibrium when time-inconsistency takes the form of myopia or hyperbolic discounting (HD). We consider an infinite horizon economy under certainty with two heterogeneous CRRA individuals, one good and one long-lived asset. T...

We introduce a new class of finite horizon stochastic decision problems in which preferences change over time, and provide a proof of the existence of a recursively optimal strategy. Recursive optimization techniques dominate many areas of economic dynamics. However, in decision problems in which tastes change over time, the solution technique most commonly applied is not recursive, but rather ...

A dynamic Walrasian economy is said to exhibit inconsistency if the competitive equilibrium path resulting from government reoptimization at some time rr0 is not a continuation of the competitive equilibrium path resulting from the initial government optimization at time 0. The present paper establishes necessary and sufficient conditions for consistency for a general class of dynamic Walrasian...

vt(mt;χt) = u(χt(mt)) + β Et[vt+1((mt −χt(mt))R+ yt+1)] (1) vt(mt;χt) = u(χt(mt)) + δβ Et[vt+1((mt −χt(mt))R+ yt+1)] (2) Notice that these functions are well defined for any consumption function χt(mt) that is feasible; they are not Bellman equations because they do not assume that the consumption function χt is optimal. For example, these functions would be well defined for χt(mt) = mt, or for...

1. The Problem and Related Literature In our daily lives, we always face decisions to make and alternative actions to choose overtime. Traditional economic analysis expects people behave rationally (take actions maximizing their payoff or utility) and thus behave consistently (following the original contingent plan or strategy) when they make these decisions. In other words, a rational agent's ...

M durable products cannot be used without a contingent consumable product, e.g., printers require ink, iPods require songs, razors require blades, etc. For such products, manufacturers may be able to lock in consumers by making their products incompatible with consumables that are produced by other firms. We examine the effectiveness of such a strategy in the presence of strategic consumers who...