COMPLEX DYNAMICS IN LUCAS’ TREE ASSET PRICING MODEL WITH DYNAMIC SELF-CONTROL PREFERENCES
Keyword(s):
This paper studies the global equilibrium dynamics implied by a Lucas’ tree asset pricing model where the representative agent is subject to temptation in consumption choices, and displays dynamic self-control preferences, as defined by Gul and Pesendorfer [(2004) Econometrica 72, 119–158.]. It shows that endogenous cycles of period 2 and higher, as well as chaotic dynamics exist provided temptation utility is sufficiently important (with respect to standard commitment utility) and sufficiently convex. For parameterizations leading to complex deterministic dynamics, a stochastic version of the model admits rational expectations equilibria displaying excess volatility with respect to the underlying fundamentals.
1997 ◽
Vol 21
(8-9)
◽
pp. 1493-1510
◽
2017 ◽
Vol 107
(8)
◽
pp. 2352-2408
◽