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Exact measures of income in a hyperbolic economy

  • PEZZEY, JOHN C.V.

For a closed economy with human-made capital, non-renewable resource depletion and (possibly) exogenous, hyperbolic technical progress as explicit-form inputs to a production function, there is a feasible development path that is as if optimal with respect to hyperbolic utility discounting. On this path, typically, welfare-equivalent income wealth-equivalent income Sefton-Weale income net national product, with possibly dramatic differences among these measures; and sustainable income can be greater than, equal to, or less than NNP. For low enough discounting, growing consumption is optimal even when technical progress is zero. A particular discount rate makes all income measures and consumption constant and (except net national product) equal; and zero technical progress then gives the Solow (1974) maximin as a special case. The optimal path is time-consistent because of the way the utility discount rate is chosen to depend on the economy s stocks, and hence on absolute time.

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Article provided by Cambridge University Press in its journal Environment and Development Economics.

Volume (Year): 9 (2004)
Issue (Month): 04 (August)
Pages: 473-484

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Handle: RePEc:cup:endeec:v:9:y:2004:i:04:p:473-484_00
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