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

Kirill Borissov, Mikhail Pakhnin and Ron Wendner

MPRA Paper from University Library of Munich, Germany

Abstract: In this paper, we propose an approach to describe the behavior of naive 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 dis- tinguish between pseudo-perfect foresight and perfect foresight. The agent with pseudo-perfect foresight revises both the consumption path and expec- tations 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 func- tions 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: D14 D91 E21 O40 (search for similar items in EconPapers)
Date: 2021-01
New Economics Papers: this item is included in nep-cwa, nep-mac and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Working Paper: The Neoclassical Growth Model with Time-Inconsistent Decision Making and Perfect Foresight (2021)
Working Paper: Naive Agents with Quasi-hyperbolic Discounting and Perfect Foresight (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:108336

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