finite horizon economy. Utility from anticipation of future consumption makes consumers patient. Furthermore, in general, it … overcome time-inconsistency, sophisticated consumers adjust their discount factors. The resulting optimal consumption path may … consumption path differ from true time preference and observational equivalence is no longer valid …

utility functions are not concave-shaped but S-shaped. We justify the S shape using consumption-based asset pricing. We show … that various consumption-based asset pricing puzzles arise from the global concavity of the utility functions, and the S …-shaped consumption utility offers a solution. Also, the S-shaped utility helps explain the low elasticity of intertemporal substitution …