IDEAS home Printed from https://ideas.repec.org/a/eee/ejores/v285y2020i1p66-80.html
   My bibliography  Save this article

Singular dividend optimization for a linear diffusion model with time-inconsistent preferences

Author

Listed:
  • Zhu, Jinxia
  • Siu, Tak Kuen
  • Yang, Hailiang

Abstract

With the advancement of behavioral economics, the use of exponential discounting for decision making in neoclassical economics has been questioned since it cannot provide a realistic way to explain certain decision-making behavior.The purpose of this paper is to investigate strategic decision making on dividend distribution policies of insurance companies when the management adopts a more realistic way for discounting, namely stochastic quasi-hyperbolic discounting. The use of this more realistic way for discounting is motivated by some recent developments in behavioral economics. A game theoretic approach is adopted to establish economic equilibrium results, namely subgame perfect Markov equilibrium strategies. It is shown that (1) under certain mild technical conditions, the barrier strategy with an optimal barrier, which is widely used in the traditional approach to optimal dividend problems, is a perfect Markov equilibrium strategy, (2) the optimal barrier is lower than the barrier of an optimal strategy obtained from the respective time-consistent optimal dividend problem, and (3) the solution based on the barrier strategy does not exist in some situations.

Suggested Citation

  • Zhu, Jinxia & Siu, Tak Kuen & Yang, Hailiang, 2020. "Singular dividend optimization for a linear diffusion model with time-inconsistent preferences," European Journal of Operational Research, Elsevier, vol. 285(1), pages 66-80.
    • Handle: RePEc:eee:ejores:v:285:y:2020:i:1:p:66-80
    DOI: 10.1016/j.ejor.2019.04.027
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0377221719303613
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.ejor.2019.04.027?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Jun Cai & Hans Gerber & Hailiang Yang, 2006. "Optimal Dividends In An Ornstein-Uhlenbeck Type Model With Credit And Debit Interest," North American Actuarial Journal, Taylor & Francis Journals, vol. 10(2), pages 94-108.
    2. Chen, Shumin & Wang, Xi & Deng, Yinglu & Zeng, Yan, 2016. "Optimal dividend-financing strategies in a dual risk model with time-inconsistent preferences," Insurance: Mathematics and Economics, Elsevier, vol. 67(C), pages 27-37.
    3. Thaler, Richard H, 1997. "Irving Fisher: Modern Behavioral Economist," American Economic Review, American Economic Association, vol. 87(2), pages 439-441, May.
    4. Thaler, Richard, 1981. "Some empirical evidence on dynamic inconsistency," Economics Letters, Elsevier, vol. 8(3), pages 201-207.
    5. Christopher Harris & David Laibson, 2013. "Instantaneous Gratification," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 128(1), pages 205-248.
    6. Zou, Ziran & Chen, Shou & Wedge, Lei, 2014. "Finite horizon consumption and portfolio decisions with stochastic hyperbolic discounting," Journal of Mathematical Economics, Elsevier, vol. 52(C), pages 70-80.
    7. Zhu, Jinxia & Chen, Feng, 2013. "Dividend optimization for regime-switching general diffusions," Insurance: Mathematics and Economics, Elsevier, vol. 53(2), pages 439-456.
    8. Chen, Shumin & Li, Zhongfei & Zeng, Yan, 2014. "Optimal dividend strategies with time-inconsistent preferences," Journal of Economic Dynamics and Control, Elsevier, vol. 46(C), pages 150-172.
    9. Shane Frederick & George Loewenstein & Ted O'Donoghue, 2002. "Time Discounting and Time Preference: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 40(2), pages 351-401, June.
    10. Paul A. Samuelson, 1937. "A Note on Measurement of Utility," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 4(2), pages 155-161.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Brinker, Leonie Violetta & Eisenberg, Julia, 2021. "Dividend optimisation: A behaviouristic approach," Insurance: Mathematics and Economics, Elsevier, vol. 101(PB), pages 202-224.
    2. Zhuo Jin & Zuo Quan Xu & Bin Zou, 2020. "A Perturbation Approach to Optimal Investment, Liability Ratio, and Dividend Strategies," Papers 2012.06703, arXiv.org, revised May 2021.
    3. Julia Eisenberg & Stefan Kremsner & Alexander Steinicke, 2021. "Two Approaches for a Dividend Maximization Problem under an Ornstein-Uhlenbeck Interest Rate," Papers 2108.00234, arXiv.org.
    4. Gaïgi, M’hamed & Ly Vath, Vathana & Scotti, Simone, 2022. "Optimal harvesting under marine reserves and uncertain environment," European Journal of Operational Research, Elsevier, vol. 301(3), pages 1181-1194.
    5. Wenyuan Wang & Xiang Yu & Xiaowen Zhou, 2021. "On optimality of barrier dividend control under endogenous regime switching with application to Chapter 11 bankruptcy," Papers 2108.01800, arXiv.org, revised Nov 2023.
    6. Julia Eisenberg & Stefan Kremsner & Alexander Steinicke, 2021. "Two Approaches for a Dividend Maximization Problem under an Ornstein-Uhlenbeck Interest Rate," Mathematics, MDPI, vol. 9(18), pages 1-20, September.
    7. Zhou, Zhou & Jin, Zhuo, 2020. "Optimal equilibrium barrier strategies for time-inconsistent dividend problems in discrete time," Insurance: Mathematics and Economics, Elsevier, vol. 94(C), pages 100-108.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Chen, Shumin & Zeng, Yan & Hao, Zhifeng, 2017. "Optimal dividend strategies with time-inconsistent preferences and transaction costs in the Cramér–Lundberg model," Insurance: Mathematics and Economics, Elsevier, vol. 74(C), pages 31-45.
    2. Drouhin, Nicolas, 2020. "Non-stationary additive utility and time consistency," Journal of Mathematical Economics, Elsevier, vol. 86(C), pages 1-14.
    3. Takeo Hori & Koichi Futagami, 2019. "A Non‐unitary Discount Rate Model," Economica, London School of Economics and Political Science, vol. 86(341), pages 139-165, January.
    4. Huiling Wu & Chengguo Weng & Yan Zeng, 2018. "Equilibrium consumption and portfolio decisions with stochastic discount rate and time-varying utility functions," OR Spectrum: Quantitative Approaches in Management, Springer;Gesellschaft für Operations Research e.V., vol. 40(2), pages 541-582, March.
    5. Shou Chen & Richard Fu & Lei Wedge & Ziran Zou, 2019. "Non-hyperbolic discounting and dynamic preference reversal," Theory and Decision, Springer, vol. 86(2), pages 283-302, March.
    6. Shigeta, Yuki, 2022. "Quasi-hyperbolic discounting under recursive utility and consumption–investment decisions," Journal of Economic Theory, Elsevier, vol. 204(C).
    7. Min Gong & David Krantz & Elke Weber, 2014. "Why Chinese discount future financial and environmental gains but not losses more than Americans," Journal of Risk and Uncertainty, Springer, vol. 49(2), pages 103-124, October.
    8. Schilirò, Daniele & Graziano, Mario, 2011. "Scelte e razionalità nei modelli economici: un'analisi multidisciplinare [Choices and rationality in economic models: a multidisciplinary analysis]," MPRA Paper 31910, University Library of Munich, Germany.
    9. Jindrich Matousek & Tomas Havranek & Zuzana Irsova, 2022. "Individual discount rates: a meta-analysis of experimental evidence," Experimental Economics, Springer;Economic Science Association, vol. 25(1), pages 318-358, February.
    10. Laurent Denant-Boemont & Enrico Diecidue & Olivier l’Haridon, 2017. "Patience and time consistency in collective decisions," Experimental Economics, Springer;Economic Science Association, vol. 20(1), pages 181-208, March.
    11. Liu, Bo & Mu, Congming & Yang, Jinqiang, 2017. "Dynamic agency and investment theory with time-inconsistent preferences," Finance Research Letters, Elsevier, vol. 20(C), pages 88-95.
    12. Faralla, Valeria & Novarese, Marco & Ardizzone, Antonella, 2017. "Framing Effects in Intertemporal Choice: A Nudge Experiment," MPRA Paper 82086, University Library of Munich, Germany.
    13. Sébastien Foudi, 2024. "Are risk attitude, impatience, and impulsivity related to the individual discount rate? Evidence from energy-efficient durable goods," Theory and Decision, Springer, vol. 96(4), pages 627-661, June.
    14. Pavlo R. Blavatskyy, 2023. "Intertemporal choice with savoring of yesterday," Theory and Decision, Springer, vol. 94(3), pages 539-554, April.
    15. Andrew Meyer, 2013. "Estimating discount factors for public and private goods and testing competing discounting hypotheses," Journal of Risk and Uncertainty, Springer, vol. 46(2), pages 133-173, April.
    16. repec:cup:judgdm:v:17:y:2022:i:5:p:988-1014 is not listed on IDEAS
    17. Philip A. Horvath & Amit K. Sinha, 2012. "Is hyperbolic discounting really evidence of irrational behavior?," Quantitative Finance, Taylor & Francis Journals, vol. 13(5), pages 665-670, October.
    18. Jan Peters & Stephan Franz Miedl & Christian Büchel, 2012. "Formal Comparison of Dual-Parameter Temporal Discounting Models in Controls and Pathological Gamblers," PLOS ONE, Public Library of Science, vol. 7(11), pages 1-12, November.
    19. Read, Daniel & Roelofsma, Peter H. M. P., 2003. "Subadditive versus hyperbolic discounting: A comparison of choice and matching," Organizational Behavior and Human Decision Processes, Elsevier, vol. 91(2), pages 140-153, July.
    20. Jean-Pierre Drugeon & Bertrand Wigniolle, 2021. "On Markovian collective choice with heterogeneous quasi-hyperbolic discounting," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 72(4), pages 1257-1296, November.
    21. Chen, Shumin & Luo, Dan & Yao, Haixiang, 2024. "Optimal investor life cycle decisions with time-inconsistent preferences," Journal of Banking & Finance, Elsevier, vol. 161(C).

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:ejores:v:285:y:2020:i:1:p:66-80. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/eor .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.