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Preference heterogeneity and its equilibrium path
Author(s) -
Peng Ling,
Kloeden Peter E.
Publication year - 2021
Publication title -
optimal control applications and methods
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.458
H-Index - 44
eISSN - 1099-1514
pISSN - 0143-2087
DOI - 10.1002/oca.2720
Subject(s) - hamilton–jacobi–bellman equation , preference , path (computing) , mathematical economics , time preference , mathematics , economics , function (biology) , mathematical optimization , econometrics , bellman equation , computer science , microeconomics , evolutionary biology , biology , programming language
This article develops a general framework for preference heterogeneity. This framework includes a discount function, a nonstandard Hamilton–Jacobi–Bellman equation (HJB) and a behavioral equation. When controlling parameters, our discount function and its HJB can reduce to those in Marín‐Solano and Patxot (2012) and among many others. In various fields, our framework can find equilibrium path in the coexistence of present bias, preference heterogeneity, and time‐inconsistency. As an example, the present paper quantifies the impact of preference heterogeneity on household financial decision‐making. It has been proven that our nonstandard HJB yields sophisticated solution (i.e., equilibrium path ), while our behavioral equation brings about naive solution and precommitted solution.