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Poverty Traps and Growth in a Model of Endogenous Time Preference

  • Chakrabarty Debajyoti

    ()

    (The University of Sydney, Australia)

We introduce endogenous probability of survival in the Keynes-Ramsey optimal growth model. An individual's probability of survival is assumed to be dependent on past levels of consumption. Endogenous probability of survival implies that the rate of time preference (or degree of patience) of an individual is endogenously determined. We solve the dynamic optimization problem facing an agent and provide a complete characterization of the steady states and their stability properties. We find that with endogenous rate of time preference an economy may have multiple steady state equilibria. The equilibrium an economy converges to depends on its initial conditions. The results are interpreted in light of the growth experiences of developing economies. The model can explain why two economies that have identical production technologies and identical preferences may converge to different levels of income depending on initial conditions. We estimate the relationship between adult probability of survival and lagged consumption for a cross section of countries. Our estimation results and subsequent simulations of the model suggest that if we interpret capital in our model broadly to include both physical and human capital, poverty traps are empirically plausible.

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Article provided by De Gruyter in its journal The B.E. Journal of Macroeconomics.

Volume (Year): 12 (2012)
Issue (Month): 1 (July)
Pages: 1-35

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Handle: RePEc:bpj:bejmac:v:12:y:2012:i:1:n:20
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  1. Galor, Oded & Zeira, Joseph, 1993. "Income Distribution and Macroeconomics," Review of Economic Studies, Wiley Blackwell, vol. 60(1), pages 35-52, January.
  2. Rolf Mantel, 1998. "Optimal Economic growth with recursive preferences: decreasing rate of time preference," Estudios de Economia, University of Chile, Department of Economics, vol. 25(2 Year 19), pages 161-178, December.
  3. Maurice Obstfeld, 1989. "Intertemporal Dependence, Impatience, and Dynamics," NBER Working Papers 3028, National Bureau of Economic Research, Inc.
  4. Azariadis, Costas & Drazen, Allan, 1990. "Threshold Externalities in Economic Development," The Quarterly Journal of Economics, MIT Press, vol. 105(2), pages 501-26, May.
  5. Epstein, Larry G., 1983. "Stationary cardinal utility and optimal growth under uncertainty," Journal of Economic Theory, Elsevier, vol. 31(1), pages 133-152, October.
  6. Lawrance, Emily C, 1991. "Poverty and the Rate of Time Preference: Evidence from Panel Data," Journal of Political Economy, University of Chicago Press, vol. 99(1), pages 54-77, February.
  7. Masao Ogaki & Andrew Atkeson, 1997. "Rate Of Time Preference, Intertemporal Elasticity Of Substitution, And Level Of Wealth," The Review of Economics and Statistics, MIT Press, vol. 79(4), pages 564-572, November.
  8. Iwai, Katsuhito, 1972. "Optimal economic growth and stationary ordinal utility --A fisherian approach," Journal of Economic Theory, Elsevier, vol. 5(1), pages 121-151, August.
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