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Necessity of the Transversality Condition for Stochastic Models with Bounded or CRRA Utility

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Author Info
Takashi Kamihigashi (Research Institute for Economics and Business Administration, Kobe University)
Abstract

This paper shows that the standard transversality condition (STVC) is nec-essary for optimality in stochastic models with bounded or constant-relative-risk- aversion (CRRA) utility under fairly general conditions. We consider an infinite-horizon stochastic maximization problem that takes a general form of a multi-sector growth model with a single consumption good. We show that the STVC is necessary if utility is bounded or logarithmic. We also show that the STVC is necessary in the case of non-logarithmic CRRA utility as long as lifetime utility is finite at the optimum. These results apply to various stochastic growth models, including real business cycle models with endoge-nous labor supply. Since unbounded utility functions that do not belong to the CRRA class are rather rare in applications, our results provide a fairly complete set of solutions regarding necessity of the STVC in practice.

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File URL: http://www.rieb.kobe-u.ac.jp/academic/ra/dp/English/dp162.pdf
File Format: application/pdf
File Function: Revised version, 2004
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Publisher Info
Paper provided by Research Institute for Economics & Business Administration, Kobe University in its series Discussion Paper Series with number 162.

Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Length: 22 pages
Date of creation: Aug 2004
Date of revision: Oct 2004
Handle: RePEc:kob:dpaper:162

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Related research
Keywords: Transversality condition; stochastic optimization; stochastic growth; CRRA; real business cycle.;

Find related papers by JEL classification:
C61 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Optimization Techniques; Programming Models; Dynamic Analysis
D90 - Microeconomics - - Intertemporal Choice and Growth - - - General
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

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