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Management of a capital stock by Strotz's naive planner

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  • Tyson, Christopher J.

Abstract

The capital management problem posed by R.H. Strotz is analyzed for the case of the 'naive' planner who fails to anticipate changes in his own preferences. By imposing progressively stronger restrictions on the primitives of the problem - namely, the discounting function, the utility index function, and the investment technology - the planner's behavior is characterized first as the solution to an ordinary differential equation and then via explicit formulae. Inasmuch as these characterizations leave the discounting function essentially unrestricted, the theory can accommodate, in particular, decision makers who discount time according to the hyperbolic and 'quasi-hyperbolic' curves used in applied work and said to be supported by psychological studies. Comparative statics of the model are discussed, as are extensions of the analysis to allow for credit constraints, limited foresight, and partial commitment.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 32 (2008)
Issue (Month): 7 (July)
Pages: 2214-2239

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Handle: RePEc:eee:dyncon:v:32:y:2008:i:7:p:2214-2239

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  1. Christopher J. Tyson, 2007. "Management of a Capital Stock by Strotz's Naive Planner," Working Papers 615, Queen Mary, University of London, School of Economics and Finance.
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Cited by:
  1. Christopher J. Tyson, 2006. "Management of a Capital Stock by Strotz's Naive Planner," Economics Papers 2006-W01, Economics Group, Nuffield College, University of Oxford.
  2. Kirill Borissov, 2011. "Growth and Distribution in a Model with Endogenous Time Peferences and Borrowing Constraints," DEGIT Conference Papers c016_073, DEGIT, Dynamics, Economic Growth, and International Trade.

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