Time-consistent equilibria in dynamic models with recursive payoffs and behavioral discounting

Łukasz Balbus, Kevin Reffett, Łukasz Woźny

Research output: Contribution to journalArticlepeer-review

Abstract

We prove existence of time consistent equilibria in a class of dynamic models with recursive payoffs and generalized discounting involving both behavioral and normative applications. Our generalized Bellman equation method identifies and separates both: recursive and strategic aspects of the equilibrium problem and allows to determine the sufficient assumptions on preferences and stochastic transition to establish existence. In particular we show existence of minimal state space stationary Markov equilibrium (a time-consistent equilibrium) in a deterministic model of consumption-saving with beta-delta discounting and its generalized versions involving non-additive payoffs, general form certainty equivalents, as well as stochastic semi-hyperbolic and hyperbolic discounting models (over possibly unbounded state and unbounded above reward space). We also provide an equilibrium approximation method for a hyperbolic discounting model.

Original languageEnglish (US)
Article number105493
JournalJournal of Economic Theory
DOIs
StateAccepted/In press - 2022

Keywords

  • Approximation
  • Generalized Bellman equation
  • Hyperbolic discounting
  • Markov equilibrium
  • Quasi-hyperbolic discounting
  • Time consistency

ASJC Scopus subject areas

  • Economics and Econometrics

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