Asset pricing with dynamically inconsistent agents

This paper investigates an endowment economy featuring dynamically inconsistent preferences. Taking a game-theoretic approach, the paper provides an explicit characterisation of the market equilibrium, including the equilibrium short rate, the equilibrium market price of risk and the equilibrium stochastic discount factor. The general results are applied to models featuring non-exponential discounting and state-dependent risk aversion. The findings underscore the significance of incorporating dynamically inconsistent preferences into economic models and offer a framework for analysing them in the context of asset pricing.