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  2. ASSA Annual Meeting
  3. 2021
  4. Preliminary Program
  5. Time Preferences
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Time Preferences

Paper Session

Sunday, Jan. 3, 2021 3:45 PM - 5:45 PM (EST)

Hosted By: Econometric Society
  • Chair: Mu Zhang, Princeton University

A First Welfare Theorem for Time-Inconsistent Agents: Efficiency and Patience Convexity

Michael Richter
,
University of London

Abstract

This paper considers a standard consumption-savings model with time-inconsistent agents and endogenous productivity. The main results demonstrate conditions under which the First Welfare Theorem holds (in any equilibrium) and conditions under which it fails (in any equilibrium). The problems with time-inconsistent agents are that savings functions need not be continuous; consumption can be nonmonotonic; equilibria may be nonunique; and their behavior cannot be understood through first order conditions. This paper addresses these difficulties by demonstrating the existence of equilibria (under certain conditions) and focusing upon a new notion around which behavior can be understood – contained steady states (which are not locally repelling). It is shown that contained steady states always exist, that there are upper and lower bounds on capital for these steady states, and that all contained steady states are consumption-efficient, although most are Pareto-inefficient. A new criterion called paternal efficiency is introduced and it is proven that patience convexity and paternal efficiency are tightly linked. The First Welfare Theorem always holds when agents have decreasing patience and always fails when agents have increasing patience. The class of increasing-patience agents includes both hyperbolic and quasi-hyperbolic discounters, thus demonstrating the inefficiency of equilibria for such discounters.

Time Consistency, Temporal Resolution Indifference and the Separation of Time and Risk

Felix Kubler
,
University of Zurich
Larry Selden
,
Columbia University
Xiao Wei
,
Fudan University and Shanghai Institute of International Finance and Economics

Abstract

For general choice spaces, standard dynamic preference models cannot simultaneously satisfy the desirable properties of time consistency, temporal resolution of risk indifference and the separation of time and risk preferences. However in the context of the dynamic consumption-portfolio optimization underlying a number of asset pricing and macro models, we derive necessary and sufficient conditions such that all three properties are satisfied. Only under these conditions, can one unambiguously separate the specific roles of time and risk preferences in explaining asset demand and intertemporal consumption-saving behavior.

The Evolution of Ineptitude: A Conundrum

Alvaro Sandroni
,
Northwestern University

Abstract

The abilities that produce evolutionary advantages can be systematically impaired after repeated competitions and highly hereditarian transmission of the winners' abilities. Economically relevant abilities may therefore not emerge after multiple competitions. Instead, ability may gradually deteriorate over time (i.e., converge to complete ineptitude) or change with no ultimate direction. This evolutionary antithesis is counterintuitive, but holds under general premises of a core model of repeated competition.

Relative Maximum Likelihood Updating of Ambiguous Beliefs

Xiaoyu Cheng
,
Northwestern University

Abstract

This paper proposes and axiomatizes a new updating rule: Relative Maximum Likelihood (RML) for ambiguous beliefs represented by a set of priors (C). This rule takes the form of applying Bayes' rule to a subset of the set C. This subset is a linear contraction of C towards its subset assigning maximal probability to the observed event. The degree of contraction captures the extent of willingness to discard priors based on likelihood when updating. Two well-known updating rules, Full Bayesian (FB) and Maximum Likelihood (ML), are included as special cases of RML. An axiomatic characterization of conditional preferences generated by RML updating is provided when the preferences admit Maxmin Expected Utility representations. The axiomatization relies on weakening the axioms characterizing FB and ML. The axiom characterizing ML is identified for the first time in this paper, addressing a long-standing open question in the literature.

Optimistic Dynamic Inconsistency

Rui Tang
,
Princeton University
Mu Zhang
,
Princeton University

Abstract

We model a decision maker who anticipates her preference to change in the future, and optimistically evaluates each menu according to the best choice that could possibly be made by her future self. We characterize this menu preference by axioms weak order, independence, semi-continuity, extremity and concavity. We prove the uniqueness of our representation and introduce comparative measures of optimism. We illustrate how our model connects optimism with the naive quasi-hyperbolic discounting model introduced by O’Donoghue and Rabin (1999, 2001). Our model generates novel predictions on decision makers’ procrastination behavior. In particular, we show that uncertainty about future payoffs can inhibit procrastination.
JEL Classifications
  • D8 - Information, Knowledge, and Uncertainty
  • D9 - Micro-Based Behavioral Economics