Dynamic Savings Choices with Disagreements

102 Pages Posted: 22 Feb 2016 Last revised: 8 Mar 2016

See all articles by Dan Cao

Dan Cao

Georgetown University - Department of Economics

Iván Werning

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: February 2016

Abstract

We study a flexible dynamic savings game in continuous time, where decision makers rotate in and out of power. These agents value spending more highly while in power creating a time-inconsistency problem. We provide a sharp characterization of Markov equilibria. Our analysis proceeds by construction and isolates the importance of a local disagreement index, `beta(c)`, defined as the ratio of marginal utility for those in and out of power. If disagreement is constant the model specializes to hyperbolic discounting. We also provide novel results for this case, offering a complete and simple characterization of equilibria. For the general model we shoe that dissaving occurs when disagreements are sufficiently high, while saving occurs when disagreements are sufficiently low. When disagreements vary sufficiently with spending, richer dynamics are possible. We provide conditions for continuous equilibria and also show that the model can be inverted for primitives that support any smooth consumption function. Our framework applies to individuals under a behavioral interpretation or to governments under a political-economy interpretation.

Suggested Citation

Cao, Dan and Werning, Ivan, Dynamic Savings Choices with Disagreements (February 2016). NBER Working Paper No. w22007, Available at SSRN: https://ssrn.com/abstract=2736083

Dan Cao (Contact Author)

Georgetown University - Department of Economics ( email )

Washington, DC 20057
United States

Ivan Werning

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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Room E52-251
Cambridge, MA 02142
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HOME PAGE: http://econ-www.mit.edu/faculty/iwerning

National Bureau of Economic Research (NBER) ( email )

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