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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. Ted O'Donoghue & Matthew Rabin, 1999. "Incentives For Procrastinators," The Quarterly Journal of Economics, MIT Press, vol. 114(3), pages 769-816, August.
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  3. Asheim, G.B., 1996. "Individual and Collective Time-Consistency," Memorandum 20/1996, Oslo University, Department of Economics.
  4. 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.
  5. Krusell, Per & Smith Jr., Anthony A, 2001. "Consumption-Savings Decisions with Quasi-Geometric Discounting," CEPR Discussion Papers 2651, C.E.P.R. Discussion Papers.
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  16. Burness, H Stuart, 1976. "A Note on Consistent Naive Intertemporal Decision Making and an Application to the Case of Uncertain Lifetime," Review of Economic Studies, Wiley Blackwell, vol. 43(3), pages 547-49, October.
  17. Goldman, Steven M, 1980. "Consistent Plans," Review of Economic Studies, Wiley Blackwell, vol. 47(3), pages 533-37, April.
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  19. Tjalling C. Koopmans, 1959. "Stationary Ordinal Utility and Impatience," Cowles Foundation Discussion Papers 81, Cowles Foundation for Research in Economics, Yale University.
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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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