Time Orientation and Asset Prices

We analyze a general-equilibrium asset pricing model where a small subset of the consumers/investors have a short-run “urge to save”. That is, their attitude toward consumption in the long run is a standard one—they do place zero weight on consumption far enough out in the future—but their short-run effective rates of discount may be negative. Our model, which is an elaboration on the framework proposed by Faruk Gul and Wolfgang Pesendorfer, does not feature time inconsistencies. Thus, we view consumers as fully rational, but subject to specific “internal frictions” in the form of temptation and self-control problems. The model nests the Mehra-Prescott model and we use it as a way of interpreting the wealth and asset pricing data. Some aspects of these data, we argue, can possibly be better understood using our model than the standard one. ∗Per Krusell and Burhanettin Kuruşçu are at the Department of Economics, Harkness Hall, University of Rochester, Rochester, NY 14627, telephone (716) 2734903, fax (716) 271-3900, and email [email protected] and [email protected]. rochester.edu, respectively; Krusell is also at the Institute for International Economic Studies and the CEPR; Anthony A. Smith, Jr. is at Graduate School of Industrial Administration, Carnegie Mellon University, Pittsburgh, PA 15213, telephone (412) 268-7583, fax (412) 268-7357, email [email protected]. We would like to thank our discussant Qiang Dai as well as Larry Epstein for helpful comments and suggestions. Krusell and Smith thank the National Science Foundation for financial support.