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Recursive Preferences and Balanced Growth

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  • Farmer, Roger E A
  • Lahiri, Amartya

Abstract

We study a class of utility functions that are defined recursively by an aggregator function. In single-agent economies it is known that a sufficient condition for the existence of a balanced growth path is that utility should be homogenous. In the context of a multi-agent economy we show that this restriction implies that either a balanced growth equilibrium fails to exist or all agents have the same constant discount factor. We suggest a generalization of recursive preferences wherein the intertemporal utility function is time dependent. Within this class we establish that there may exist a balanced growth equilibrium even if agents are different. We give an example of our approach in the international context in which time dependence occurs because countries care about their relative position in the world income distribution.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3949.

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Date of creation: Jun 2003
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Handle: RePEc:cpr:ceprdp:3949

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Related research

Keywords: balanced growth; endogenous income distribution; recursive utility;

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References

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  1. Epstein, Larry G & Hynes, J Allan, 1983. "The Rate of Time Preference and Dynamic Economic Analysis," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 611-35, August.
  2. Boud, John III, 1990. "Recursive utility and the Ramsey problem," Journal of Economic Theory, Elsevier, vol. 50(2), pages 326-345, April.
  3. Stephanie Schmitt-Grohe & Martin Uribe, 2002. "Closing Small Open Economy Models," NBER Working Papers 9270, National Bureau of Economic Research, Inc.
  4. Burmeister,Edwin, 1980. "Capital Theory and Dynamics," Cambridge Books, Cambridge University Press, number 9780521297035, October.
  5. Sergio Rebelo, 1999. "Long Run Policy Analysis and Long Run Growth," Levine's Working Paper Archive 2114, David K. Levine.
  6. Lucas, Robert Jr. & Stokey, Nancy L., 1984. "Optimal growth with many consumers," Journal of Economic Theory, Elsevier, vol. 32(1), pages 139-171, February.
  7. Tjalling C. Koopmans, 1959. "Stationary Ordinal Utility and Impatience," Cowles Foundation Discussion Papers 81, Cowles Foundation for Research in Economics, Yale University.
  8. T. W. Swan, 1956. "ECONOMIC GROWTH and CAPITAL ACCUMULATION," The Economic Record, The Economic Society of Australia, vol. 32(2), pages 334-361, November.
  9. Swan, Trevor W, 2002. "Economic Growth," The Economic Record, The Economic Society of Australia, vol. 78(243), pages 375-80, December.
  10. Dolmas, Jim, 1996. "Balanced-growth-consistent recursive utility," Journal of Economic Dynamics and Control, Elsevier, vol. 20(4), pages 657-680, April.
  11. Mendoza, Enrique G, 1991. "Real Business Cycles in a Small Open Economy," American Economic Review, American Economic Association, vol. 81(4), pages 797-818, September.
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Citations

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Cited by:
  1. Harashima, Taiji, 2012. "Sustainable Heterogeneity as the Unique Socially Optimal Allocation for Almost All Social Welfare Functions," MPRA Paper 40938, University Library of Munich, Germany.
  2. Taiji Harashima, 2005. "Endogenous Growth Models in Open Economies: A Possibility of Permanent Current Account Deficits," International Trade 0502001, EconWPA, revised 10 Feb 2005.
  3. Mohamed Mabrouk, 2005. "Intergenerational anonymity as an alternative to the discounted- sum criterion in the calculus of optimal growth II: Pareto optimality and some economic interpretations," GE, Growth, Math methods 0511007, EconWPA.
  4. Mohamed Mabrouk, 2005. "Intergenerational anonymity as an alternative to the discounted- sum criterion in the calculus of optimal growth I: Consensual optimality," GE, Growth, Math methods 0510013, EconWPA.
  5. Roche, Hervé, 2011. "Asset prices in an exchange economy when agents have heterogeneous homothetic recursive preferences and no risk free bond is available," Journal of Economic Dynamics and Control, Elsevier, vol. 35(1), pages 80-96, January.
  6. Harashima, Taiji, 2010. "Sustainable Heterogeneity: Inequality, Growth, and Social Welfare in a Heterogeneous Population," MPRA Paper 22521, University Library of Munich, Germany.
  7. Harashima, Taiji, 2013. "Sustainable Heterogeneity in Exogenous Growth Models: The Socially Optimal Distribution by Government’s Intervention," MPRA Paper 51653, University Library of Munich, Germany.
  8. Marla Ripoll & Juan Carlos Cordoba, 2011. "A Contribution to the Economic Theory of Fertility," 2011 Meeting Papers 1207, Society for Economic Dynamics.
  9. Harashima, Taiji, 2009. "Trade Liberalization and Heterogeneous Rates of Time Preference across Countries: A Possibility of Trade Deficits with China," MPRA Paper 19386, University Library of Munich, Germany.

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