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Management of a Capital Stock by Strotz`s Naive Planner

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  • Christopher Tyson

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 primitive of the problem - namely, the planner`s discounting function, his utlity 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 explictly 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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Bibliographic Info

Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 2006-W01.

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Date of creation: 01 Mar 2006
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Handle: RePEc:oxf:wpaper:2006-w01

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Keywords: Consumption; Computation; Hyperbolic discounting; Time preference;

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References

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  1. Laibson, David I., 1997. "Golden Eggs and Hyperbolic Discounting," Scholarly Articles 4481499, Harvard University Department of Economics.
  2. Ted O'Donoghue and Matthew Rabin ., 1997. "Doing It Now or Later," Economics Working Papers 97-253, University of California at Berkeley.
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  8. Christopher Tyson, 2006. "Management of a Capital Stock by Strotz`s Naive Planner," Economics Series Working Papers 2006-W01, University of Oxford, Department of Economics.
  9. Per Krusell & Anthony A Smith, Jr., 2001. "Consumption Savings Decisions with Quasi-Geometric Discounting," Levine's Working Paper Archive 625018000000000251, David K. Levine.
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Cited by:
  1. 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.
  2. Christopher Tyson, 2006. "Management of a Capital Stock by Strotz`s Naive Planner," Economics Series Working Papers 2006-W01, University of Oxford, Department of Economics.

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