Larry Selden

Characterizing Myopic Intertemporal Demand

Coauthor(s): Yakar Kannai, Xiao Wei.

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Abstract:
In the standard certainty multiperiod demand problem it is well-known that if a consumer's preferences are log additive (or equivalently Cobb-Douglas), demand in each period is myopic in the sense of being independent of future prices. As a result, less stringent informational requirements in terms of price expectations are imposed on the consumer. Given the general aversion of Fisher (1930), Hicks (1965) and Lucas (1978), among others, to requiring preferences to be additively separable, it is natural to ask whether myopia can hold for non-additive forms of utility. In a multigood, multiperiod setting, we first show that neither additive separability nor logarithmic period utility is required for myopia and then characterize the form of utility which generates myopic demand. As an application, we derive simple restrictions on equilibrium interest rates which are necessary and sufficient for utility to take the myopic form. The resulting conditions for myopic utility are arguably less restrictive than those implied by preferences which are additively separable.

Source: Working Paper
Exact Citation:
Kannai, Yakar, Larry Selden, and Xiao Wei. "Characterizing Myopic Intertemporal Demand." Working Paper, Columbia Business School, 2012.
Date: 2012