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

See all articles by Per Krusell

Per Krusell

Princeton University - Department of Economics; Stockholm University - Institute for International Economic Studies (IIES); Centre for Economic Policy Research (CEPR)

Burhanettin Kuruscu

University of Toronto - Department of Economics

Anthony A. Smith

Yale University - Cowles Foundation

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Abstract

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

Suggested Citation

Krusell, Per L. and Kuruscu, Burhanettin and Smith, Anthony A., Equilibrium Welfare and Government Policy with Quasi-Geometric Discounting. Journal of Economic Theory Journal of Economic Theory, Vol. 105, pp. 42-72, July 2002. Available at SSRN: https://ssrn.com/abstract=519482

Per L. Krusell

Princeton University - Department of Economics ( email )

111 Fisher Hall
Princeton, NJ
United States
609-258-4003 (Phone)
609-258-6419 (Fax)

HOME PAGE: http://rincewind.iies.su.se/%7Ekrusell/

Stockholm University - Institute for International Economic Studies (IIES) ( email )

Stockholm, SE-10691
Sweden
+46 0 8 16 30 73 (Phone)
+46 0 8 16 41 77 (Fax)

HOME PAGE: http://rincewind.iies.su.se/%7Ekrusell/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Burhanettin Kuruscu (Contact Author)

University of Toronto - Department of Economics ( email )

Toronto, Ontario M5S 3G8
Canada

HOME PAGE: http://https://sites.google.com/site/bkuruscu

Anthony A. Smith

Yale University - Cowles Foundation ( email )

Box 208281
New Haven, CT 06520-8281
United States

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