Socially determined time preference in discrete time

Gomes, Orlando (2007): Socially determined time preference in discrete time.

Abstract

The aim of the paper is to develop a discrete time version of a one-sector optimal growth model with endogenous time preference. The intertemporal discount rate is determined by social factors (i.e., factors that are external to the individual agent), namely the economy wide levels of consumption and income. In continuous time, the combined effect of the previous factors is known to eventually produce local indeterminacy, instead of the well known saddle-path equilibrium of the standard Ramsey model. In discrete time, the possibility of local indeterminacy is explored under several types of Ramsey models with endogenous time preference: neo-classical and endogenous growth models, and models with production externalities and endogenous labor supply. Besides finding various possibilities regarding local dynamics, we also find that one of the models can give place to endogenous fluctuations, although this occurs only under rather exceptional circumstances.

• Item Type: MPRA Paper
• Institution: Escola Superior de Comunicação Social - Instituto Politécnico de Lisboa
• Language: English
• Keywords: Endogenous time preference; Growth models; Stability analysis; Technological externalities; Endogenous labor supply
• Subjects: C - Mathematical and Quantitative Methods > C6 - Mathematical Methods ; Programming Models ; Mathematical and Simulation Modeling > C61 - Optimization Techniques ; Programming Models ; Dynamic Analysis; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O41 - One, Two, and Multisector Growth Models

References

Barro, R. J. (1999). “Ramsey Meets Laibson in the Neoclassical Growth Model.” Quarterly Journal of Economics, vol. 114, pp. 1153-1191. Boyarchenko, S. I. and S. Z. Levendorskii (2005). “A Theory of Endogenous Time Preference and Discounted Utility Anomalies.” The University of Texas, department of Economics working paper. Caballé, J.; X. Jarque and E. Michetti (2006). “Chaotic Dynamics in Credit Constrained Emerging Economies.” Journal of Economic Dynamics and Control, vol. 30, pp. 1261-1275. Cellarier, L. (2006). “Constant Gain Learning and Business Cycles.” Journal of Macroeconomics, vol. 28, pp. 51-85. Christiano, L. and S. Harrison (1999). “Chaos, Sunspots and Automatic Stabilizers.” Journal of Monetary Economics, vol. 44, pp. 3-31. Drugeon, J. P. (1998). “A Model with Endogenously Determined Cycles, Discounting and Growth.” Economic Theory, vol. 12, pp. 349-369. Epstein, L. G. (1987). “”A Simple Dynamic General Equilibrium Model.” Journal of Economic Theory, vol. 41, pp. 68-95. Frederick, S.; G.Loewenstein and T.Donoghue (2002). “Time Discounting and Time Preference: a Critical Review.” Journal of Economic Literature, vol. 40, pp. 351–401. Guo, J. T. and K. J. Lansing (2002). “Fiscal Policy, Increasing Returns and Endogenous Fluctuations.” Macroeconomic Dynamics, vol. 6, pp. 633-664. Kahneman, D. (2003). “Maps of Bounded Rationality: Psychology for Behavioral Economics.” American Economic Review, vol. 93, pp. 1449-1475. Kahneman, D. and A.Tversky (1979). “Prospect Theory: an Analysis of Decision Under Risk.” Econometrica, vol. 47, pp. 263–292. Laibson, D. I. (1997). “Golden Eggs and Hyperbolic Discounting.” Quarterly Journal of Economics, vol. 112, pp. 443-447. Meng, Q. (2006). “Impatience and Equilibrium Indeterminacy.” Journal of Economic Dynamics and Control, vol. 30, pp. 2671-2692. O’Donoghue, T. and M. Rabin (1999). “Doing it Now or Doing it Later.” American Economic Review, vol. 98, pp. 103-124. Schmitt-Grohé, S. (2000). “Endogenous Business Cycles and the Dynamics of Output, Hours, and Consumption.” American Economic Review, vol. 90, pp. 1136-1159. Uzawa, H. (1968). “Time Preference, the Consumption Function, and the Optimum Asset Holdings.” in J. N. Wolfe (ed.), Value, Capital and Growth: Papers in Honour of Sir John Hicks. Edinburgh: University of Edinburgh Press.