Equilibrium Welfare and Government Policy with Quasi-Geometric Discounting

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