Stern, Michael L.: Endogenous Time Preference and Optimal Growth
World Conference Econometric Society, 2000, Seattle

Michael L. Stern, Indiana University
Endogenous Time Preference and Optimal Growth
Session: C-6-7  Sunday 13 August 2000  by Stern, Michael L.
We adapt the classic one-sector optimal growth model to include an endogenous and time-varying rate of time preference along the lines of Becker and Mulligan (1997). Our model is both time-consistent and analytically tractable. We establish that much of the classic dynamic programming machinery applies to our new model under very general circumstances. Furthermore, the optimal capital sequences are shown to be monotone and a turnpike theorem is also established. We proceed to analyze the model under Cobb-Douglas production as well as linear production. We find that our model supports cases of unique steady states, multiple steady states, and conditionally sustained growth. Hence our model does not in general exhibit the global convergence result of the fixed discounting optimal growth model. We are even able to explicitly solve the model for the optimal policy functions given some specific functional forms.

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