1. Optimal irrational behavior in continuous time
- Author
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Feigenbaum, James and Caliendo, Frank N.
- Subjects
Business ,Economics - Abstract
To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jedc.2010.05.013 Byline: James Feigenbaum, Frank N. Caliendo Abstract: showed in a two-period overlapping generations model that households can improve upon the rational, competitive equilibrium while maintaining competitive factor markets if agents coordinate upon an irrational consumption/saving rule. We generalize their findings to continuous time. The optimal consumption rule with coordination implies a U-shaped lifecycle consumption profile. Rational agents living in a standard competitive equilibrium would need a 4% increase of consumption in every period across the lifecycle to reach the level of utility that can be achieved under coordination. Most of this gain can be achieved with a linear saving rule. Author Affiliation: Department of Economics and Finance, Utah State University, Logan, UT 84322-3565, USA Article History: Received 6 April 2009; Accepted 17 March 2010
- Published
- 2010