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Management of a capital stock by Strotz's naive planner

  • Tyson, Christopher J.

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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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 32 (2008)
Issue (Month): 7 (July)
Pages: 2214-2239

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Handle: RePEc:eee:dyncon:v:32:y:2008:i:7:p:2214-2239
Contact details of provider: Web page: http://www.elsevier.com/locate/jedc

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  1. Paul A. Samuelson, 1937. "A Note on Measurement of Utility," Review of Economic Studies, Oxford University Press, vol. 4(2), pages 155-161.
  2. Steven M. Goldman, 1980. "Consistent Plans," Review of Economic Studies, Oxford University Press, vol. 47(3), pages 533-537.
  3. Matthew Rabin & Ted O'Donoghue, 1999. "Doing It Now or Later," American Economic Review, American Economic Association, vol. 89(1), pages 103-124, March.
  4. 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.
  5. Geir B. Asheim, 1995. "Individual and Collective Time-Consistency," Discussion Papers 1128, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  6. Ted O' Donoghue and Matthew Rabin., 2000. "Choice and Procrastination," Economics Working Papers E00-281, University of California at Berkeley.
  7. Ted O'Donoghue & Matthew Rabin, 1999. "Incentives for Procrastinators," The Quarterly Journal of Economics, Oxford University Press, vol. 114(3), pages 769-816.
  8. Christopher Harris & David Laibson, 2001. "Instantaneous Gratification," NajEcon Working Paper Reviews 625018000000000267, www.najecon.org.
  9. Schelling, Thomas C, 1984. "Self-Command in Practice, in Policy, and in a Theory of Rational Choice," American Economic Review, American Economic Association, vol. 74(2), pages 1-11, May.
  10. George Loewenstein & Drazen Prelec, 1992. "Anomalies in Intertemporal Choice: Evidence and an Interpretation," The Quarterly Journal of Economics, Oxford University Press, vol. 107(2), pages 573-597.
  11. Per Krusell & Anthony A Smith, Jr., 2001. "Consumption Savings Decisions with Quasi-Geometric Discounting," Levine's Working Paper Archive 625018000000000251, David K. Levine.
  12. Laibson, David I., 1997. "Golden Eggs and Hyperbolic Discounting," Scholarly Articles 4481499, Harvard University Department of Economics.
  13. R. A. Pollak, 1968. "Consistent Planning," Review of Economic Studies, Oxford University Press, vol. 35(2), pages 201-208.
  14. 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.
  15. Robert J. Barro, 1999. "Ramsey Meets Laibson in the Neoclassical Growth Model," The Quarterly Journal of Economics, Oxford University Press, vol. 114(4), pages 1125-1152.
  16. Tjalling C. Koopmans, 1959. "Stationary Ordinal Utility and Impatience," Cowles Foundation Discussion Papers 81, Cowles Foundation for Research in Economics, Yale University.
  17. Charles Blackorby & David Nissen & Daniel Primont & R. Robert Russell, 1973. "Consistent Intertemporal Decision Making," Review of Economic Studies, Oxford University Press, vol. 40(2), pages 239-248.
  18. Christopher Harris & David Laibson, 1999. "Dynamic Choices of Hyperbolic Consumers," Harvard Institute of Economic Research Working Papers 1886, Harvard - Institute of Economic Research.
  19. Bezalel Peleg & Menahem E. Yaari, 1973. "On the Existence of a Consistent Course of Action when Tastes are Changing," Review of Economic Studies, Oxford University Press, vol. 40(3), pages 391-401.
  20. Fishburn, Peter C & Rubinstein, Ariel, 1982. "Time Preference," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 23(3), pages 677-94, October.
  21. H. Stuart Burness, 1976. "A Note on Consistent Naive Intertemporal Decision Making and an Application to the Case of Uncertain Lifetime," Review of Economic Studies, Oxford University Press, vol. 43(3), pages 547-549.
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