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Time-inconsistent preferences, investment and asset pricing

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Listed:
  • Liu, Bo
  • Lu, Lei
  • Mu, Congming
  • Yang, Jinqiang

Abstract

In this paper, we present a production-based asset pricing model in which agents have time-inconsistent preferences. We find that the time-inconsistent preferences lead to under-investment, over-consumption, and higher interest rate. These variables are distorted more in the economy with naive agent than the economy with sophisticated agent. In particular, the sophisticated agent invests more and consumes less than the naive agent, but invests less and consumes more than the time-consistent agent. The interest rate in the sophisticated agent economy is lower than that in the naive agent economy, but higher than that in the time-consistent agent economy.

Suggested Citation

  • Liu, Bo & Lu, Lei & Mu, Congming & Yang, Jinqiang, 2016. "Time-inconsistent preferences, investment and asset pricing," Economics Letters, Elsevier, vol. 148(C), pages 48-52.
    • Handle: RePEc:eee:ecolet:v:148:y:2016:i:c:p:48-52
    DOI: 10.1016/j.econlet.2016.09.015
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    References listed on IDEAS

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    Cited by:

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    2. Yushi Hamaguchi & Alex S. L. Tse, 2024. "Periodic portfolio selection with quasi-hyperbolic discounting," Papers 2410.18240, arXiv.org.
    3. Wang, Yuanping & Mu, Congming, 2019. "Can ambiguity about rare disasters explain equity premium puzzle?," Economics Letters, Elsevier, vol. 183(C), pages 1-1.
    4. Shigeta, Yuki, 2022. "Quasi-hyperbolic discounting under recursive utility and consumption–investment decisions," Journal of Economic Theory, Elsevier, vol. 204(C).

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    More about this item

    Keywords

    Time-inconsistent preferences; Investment; Consumption; Interest rate;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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