Preference heterogeneity and its equilibrium path

Abstract

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.