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Management of a Capital Stock by Strotz's Naive Planner

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  • Christopher J. Tyson

    ()
    (Queen Mary, University of London)

Abstract

The capital management problem posed by R. H. Strotz is analyzed for the case of the "naive" planner who fails to anticipate changes in his own preferences. By imposing progressively stronger restrictions on the primitives of the problem - namely, the discounting function, the utility index function, and the investment technology - the planner's behavior is characterized first as the solution to an ordinary differential equation and then via explicit formulae. Inasmuch as these characterizations leave the discounting function essentially unrestricted, the theory can accommodate, in particular, decision makers who discount time according to the hyperbolic and "quasi-hyperbolic" curves used in applied work and said to be supported by psychological studies. Comparative statics of the model are discussed, as are extensions of the analysis to allow for credit constraints, limited foresight, and partial commitment.

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Paper provided by Queen Mary, University of London, School of Economics and Finance in its series Working Papers with number 615.

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Date of creation: Oct 2007
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Handle: RePEc:qmw:qmwecw:wp615

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

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  1. Christopher Harris & David Laibson, 2001. "Instantaneous Gratification," Levine's Working Paper Archive 625018000000000267, David K. Levine.
  2. Shane Frederick & George Loewenstein & Ted O'Donoghue, 2002. "Time Discounting and Time Preference: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 40(2), pages 351-401, June.
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  7. 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.
  8. Laibson, David I., 1997. "Golden Eggs and Hyperbolic Discounting," Scholarly Articles 4481499, Harvard University Department of Economics.
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  14. Per Krusell & Anthony A. Smith, Jr., 2003. "Consumption--Savings Decisions with Quasi--Geometric Discounting," Econometrica, Econometric Society, vol. 71(1), pages 365-375, January.
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  17. Peleg, Bezalel & Yaari, Menahem E, 1973. "On the Existence of a Consistent Course of Action when Tastes are Changing," Review of Economic Studies, Wiley Blackwell, vol. 40(3), pages 391-401, July.
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Cited by:
  1. 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.
  2. Borissov, Kirill, 2013. "Growth and distribution in a model with endogenous time preferences and borrowing constraints," Mathematical Social Sciences, Elsevier, vol. 66(2), pages 117-128.

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