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Lunchseminar in Economics: The Neoclassical Growth Model with Time-Inconsistent Decision Making and Perfect Foresight

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Speaker: Mikhail Pakhnin, European University at St Petersburg, RUS
Event date: Wednesday, 26 January 2022 01:00 pm - 02:00 pm
Place: ONLINE ACCESS

Participation on invitation only: Please contact dem@uni.lu

Abstract

In this paper, we propose an approach to describe the behavior of naive agents with quasi-hyperbolic discounting in the neoclassical growth model. To study time-inconsistent decision making of an agent who cannot commit to future actions, we introduce the notion of sliding equilibrium and distinguish between pseudo-perfect foresight and perfect foresight. The agent with pseudo-perfect foresight revises both the consumption path and expectations about prices; the agent with perfect foresight correctly foresees prices in a sliding equilibrium and is naive only about their time inconsistency. We prove the existence of sliding equilibria for the class of isoelastic utility functions and show that generically consumption paths are not the same under quasi-hyperbolic and exponential discounting. Observational equivalence only holds in the well-known cases of a constant interest rate or logarithmic utility. Our results suggest that perfect foresight implies a higher long-run capital stock and consumption level than pseudo-perfect foresight.

 

Mikhail Pakhnin is associate professor at the Department of Economics at the European University at St. Petersburg. He obtained his PhD in economics (Dr. rer. pol.) from the Karlsruhe Institute of Technology in 2018. He also holds a Master's degree in mathematical physics from the St. Petersburg State University. Mikhail Pakhnin is also a CESifo Research Network Affiliate, and a member of the New Economic Association (NEA). His main research fields include economic growth and macroeconomic dynamics; natural resources; political economy; networks.