Being-serious-about-non-commitment：subgame-perfect-equilibrium-in-continuous-time.pdf

Being serious about non-commitment: subgame perfect equilibrium in continuous time ∗ † Ivar Ekeland and Ali Lazrak. Preliminary version: Mars 2006 Abstract This paper characterizes differentiable subgame perfect equilibria in a continuous time intertemporal decision optimization problem with non- constant discounting. The equilibrium equation takes two different forms, one of which is reminescent of the classical Hamilton-Jacobi-Bellman equa- tion of optimal control, but with a non-local term. We give a local existence result, and several examples in the consumption saving prob- lem. The analysis is then applied to suggest that non constant discount rates generate an indeterminacy of the steady state in the Ramsey growth model. Despite its indeterminacy, the steady state level is robust to small deviations from constant discount rates. ∗University of British Columbia, mathematics and economic departments (eke- land@math.ubc.ca) †Sauder School of Business at the University of British Columbia (ali.lazrak@sauder.ubc.ca) 1 1 Introduction This paper adresses the problem of time inconsistency under non-constant dis- counting. Whereas our method and result are quite general in character, we have chosen to illustrate them in the framework of the Ramsey model of eco- nomic growth, (1928; see for instance [6]), which has also been used as a test case by Barro [5] and Karp [18] in their investigations of the subject. In its typical formulation, the Ramsey model represents the decision maker as maximizing: max 0T