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Management of a Capital Stock by Strotz's Naive Planner

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Abstract

A generalized version of the capital management problem posed in a classic paper by R. H. Strotz is analyzed for the case of the "naive" planner who fails to anticipate any impending change in his own preferences. By imposing progressively stronger restrictions on the primitives of the problem --- namely, the planner's discounting function, his utility index function, and the investment technology --- the path of the capital stock is characterized first implicitly as the solution to a differential equation and then explicitly via formulae that may or may not be expressible in closed form. Inasmuch as this procedure turns out to leave the discounting function essentially unrestricted, the theory can accommodate, in particular, decision makers who discount time according to the type of hyperbolic curve said to be suggested by psychological studies. Strategies for numerical computation of capital paths are discussed and are demonstrated in sample planning problems.

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File URL: http://www.nuffield.ox.ac.uk/economics/papers/2006/w1/300306.pdf
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Bibliographic Info

Paper provided by Economics Group, Nuffield College, University of Oxford in its series Economics Papers with number 2006-W01.

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Length: 25 pages
Date of creation: 30 Mar 2006
Date of revision:
Handle: RePEc:nuf:econwp:0601

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Web page: http://www.nuff.ox.ac.uk/economics/

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Keywords: consumption; computation; hyperbolic discounting; time preference.;

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  16. 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.
  17. Christopher Harris & David Laibson, 1999. "Dynamic Choices of Hyperbolic Consumers," Harvard Institute of Economic Research Working Papers 1886, Harvard - Institute of Economic Research.
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Cited by:
  1. Tyson, Christopher J., 2008. "Management of a capital stock by Strotz's naive planner," Journal of Economic Dynamics and Control, Elsevier, vol. 32(7), pages 2214-2239, July.
  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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