Equilibrium Analysis in Behavioural One-Sector Growth Models

Acemoglu, Daron; Jensen, Martin Kaae

Abstract

Rich behavioral biases, mistakes and limits on rational decision-making are often thought to make equilibrium analysis much more intractable. We establish that this is not the case in the context of one-sector growth models such as Ramsey-Cass-Koopmans or Bewley-Aiyagari models. We break down the response of the economy to a change in the environment or policy into two parts: the direct response at the given (pre-tax) prices, and the equilibrium response which plays out as prices change. Our main result demonstrates that under weak regularity conditions, regardless of the details of behavioral preferences, mistakes and constraints on decision-making, the long-run equilibrium will involve a greater capital-labor ratio if and only if the direct response (from the corresponding consumption-saving model) involves an increase in aggregate savings. One implication of this result is that, from a qualitative point of view, behavioral biases matter for long-run equilibrium if and only if they change the direction of the direct response. We provide detailed illustrations of how this result can be applied and generates new insights using models of misperceptions, self-control and temptation, and naive and sophisticated quasi-hyperbolic discounting.

Citation

Acemoglu, D., & Jensen, M. K. (2024). Equilibrium Analysis in Behavioural One-Sector Growth Models. Review of Economic Studies, 91(2), 599-640. https://doi.org/10.1093/restud/rdad043

• Journal Article Type: Article
• Acceptance Date: Dec 23, 2022
• Online Publication Date: Apr 6, 2023
• Publication Date: 2024-03
• Deposit Date: Jan 27, 2023
• Publicly Available Date: Apr 7, 2025
• Journal: Review of Economic Studies
• Print ISSN: 0034-6527
• Electronic ISSN: 1467-937X
• Publisher: Oxford University Press
• Peer Reviewed: Peer Reviewed
• Volume: 91
• Issue: 2
• Pages: 599-640
• DOI: https://doi.org/10.1093/restud/rdad043
• Public URL: https://nottingham-repository.worktribe.com/output/16504275
• Publisher URL: https://academic.oup.com/restud/advance-article-abstract/doi/10.1093/restud/rdad043/7109878