Equilibrium Welfare and Government Policy with Quasi-Geometric Discounting
Journal of Economic Theory Journal of Economic Theory, Vol. 105, pp. 42-72, July 2002
31 Pages Posted: 13 Sep 2010
We consider a representative-agent equilibrium model where the consumer has quasi-geometric discounting and cannot commit to future actions. We restrict attention to a parametric class for preferences and technology and solve for time-consistent competitive equilibria globally and explicitly. We then characterize the welfare properties of competitive equilibria and compare them to that of a planning problem. The planner is a consumer representative who, without commitment but in a time consistent way, maximizes his present-value utility subject to resource constraints. The competitive equilibrium results in strictly higher welfare than does the planning problem whenever the discounting is not geometric.
Keywords: quasi-geometric discounting, Markov equilibrium, taxation, time-consistent policy
JEL Classification: E21, E61, E91
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