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Management of a Capital Stock by Strotz's Naive Planner

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Author Info
Christopher J. Tyson () (Nuffield College, Oxford University)
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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Publisher Info
Paper provided by Economics Group, Nuffield College, University of Oxford in its series Economics Papers with number 2006-W01.

Download reference. The following formats are available: HTML, plain text, BibTeX, RIS (EndNote), ReDIF
Length: 25 pages
Date of creation: 30 Mar 2006
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Handle: RePEc:nuf:econwp:0601

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

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Related research
Keywords: consumption computation hyperbolic discounting time preference.

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Find related papers by JEL classification:
C60 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - General
D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving
E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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