Asset Pricing with Dynamically Inconsistent Agents

This paper develops a framework to study general equilibrium implications for an economy in which agents are allowed to have dynamically inconsistent time and risk preferences. This framework accommodates, but is not limited to, the following settings: (1) non-exponential discounting; (2) horizon dependent risk aversion; (3) current state dependent risk aversion. In these models preferences over future outcomes change over time and thus the Bellman optimality principle does not hold. In the spirit of Strotz (1955) I take a game theoretic approach to the solution of agent's problem