Working Paper: NBER ID: w25376
Authors: Marco Bassetto; Zhen Huo; Josvctor Rosrull
Abstract: This paper proposes a new equilibrium concept – organizational equilibrium – for models with state variables that have a time-inconsistency problem. The key elements of this equilibrium concept are: (1) agents are allowed to ignore the history and restart the equilibrium; (2) agents can wait for future agents to start the equilibrium. We apply this equilibrium concept to a quasi-geometric discounting growth model and to a problem of optimal dynamic fiscal policy. We find that the allocation gradually transits from that implied by its Markov perfect equilibrium towards that implied by the solution under commitment, but stopping short of the Ramsey outcome. The feature that the time inconsistency problem is resolved slowly over time rationalizes the notion that good will is valuable but has to be built gradually.
Keywords: organizational equilibrium; time inconsistency; fiscal policy; dynamic models
JEL Codes: C73; E61; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| organizational equilibrium (D51) | allocations that are Pareto superior (D61) |
| organizational equilibrium (D51) | improved outcomes in dynamic fiscal policy (E62) |
| Markov equilibria (D51) | low-saving behavior (D14) |
| time inconsistency problem resolved (D15) | higher-saving behavior (D14) |
| organizational equilibrium (D51) | capital accumulation (E22) |
| organizational equilibrium (D51) | steady state preferred by an agent (C62) |
| gradual resolution of time inconsistency (D15) | goodwill built over time (L14) |