Time Inconsistent Preferences with Time Dependent Relative Risk Aversion : A Model with Some Macroeconomic Applications

This paper proposes a model of intertemporal preferences where the relative risk aversion depends on the time horizon of the agent. The agent is supposed to evaluate risk in the short run with a relative risk aversion coefficient which differs from its long run value. As preferences are no more time consistent, decisions are the solution of a game between the successive selves. The model is applied to the problem of the optimal choice of saving with a risky interest rate and to the equity premium puzzle. A time-dependent risk aversion may help to solve the puzzle