Abstract
I examine the role of the experimentally documented bias time-inconsistency for the dynamics of asset prices and wealth distribution between agents with recursive preferences. In a general equilibrium model with two types of investors, time-consistent and time-inconsistent, I show that the wealth share of the time-inconsistent agent is strictly lower than the one of the time-consistent agent, all else equal. The time-inconsistent investor, however, can dominate in the long-run despite her bias, in case she incorrectly believes that in the future she will save more than the time-consistent investor. In the presence of long-run risk accounting for time-inconsistency allows to study and endogenously match asset pricing dynamics such as the countercyclical feature of the equity premium that we observe in reality. These dynamics stem from the fact that the time-inconsistent investor who is less averse to persistent shocks tends to sell insurance against them to the time-consistent agent.
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