The paper examines some implications of the wholly reasonable assumption that the elasticity of intertemporal substitution (the EIS) increases with the level of consumption. Then the rich find it easier to substitute future consumption for present consumption than do the poor. In the empirical macro-economics literature the same assumption has been employed and vindicated in cross-section analysis by Attansio and Browning (1995). Here the approach is to build theoretical models of two kinds of poverty traps. A family of explicit direct utility functions that yield the required property is exhibited. Members of this family can give weak b-convergence in a Ramsey-style growth model, or multiple stable solutions in the Diamond capital model. The last finding is in strong contrast to the monograph De La Croix (2002), which leaves the impression that multiple stable solutions are unlikely.
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Paper provided by Economics Group, Nuffield College, University of Oxford in its series Economics Papers with number
2004-W26.
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