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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. Ted O'Donoghue & Matthew Rabin, 1996. "Doing It Now or Later," Discussion Papers 1172, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  2. Laibson, David I., 1997. "Golden Eggs and Hyperbolic Discounting," Scholarly Articles 4481499, Harvard University Department of Economics.
  3. Loewenstein, George & Prelec, Drazen, 1992. "Anomalies in Intertemporal Choice: Evidence and an Interpretation," The Quarterly Journal of Economics, MIT Press, vol. 107(2), pages 573-97, May.
  4. Ted O'Donoghue & Matthew Rabin, 1999. "Incentives For Procrastinators," The Quarterly Journal of Economics, MIT Press, vol. 114(3), pages 769-816, August.
  5. Christopher J. Tyson, 2006. "Management of a Capital Stock by Strotz's Naive Planner," Economics Papers 2006-W01, Economics Group, Nuffield College, University of Oxford.
  6. Robert J. Barro, 1999. "Ramsey Meets Laibson In The Neoclassical Growth Model," The Quarterly Journal of Economics, MIT Press, vol. 114(4), pages 1125-1152, November.
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  9. Ted O' Donoghue and Matthew Rabin., 2000. "Choice and Procrastination," Economics Working Papers E00-281, University of California at Berkeley.
  10. Goldman, Steven M, 1980. "Consistent Plans," Review of Economic Studies, Wiley Blackwell, vol. 47(3), pages 533-37, April.
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  12. 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.
  13. 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.
  14. Per Krusell & Anthony A Smith, Jr., 2001. "Consumption Savings Decisions with Quasi-Geometric Discounting," NajEcon Working Paper Reviews 625018000000000251, www.najecon.org.
  15. Christopher Harris & David Laibson, 1999. "Dynamic Choices of Hyperbolic Consumers," Harvard Institute of Economic Research Working Papers 1886, Harvard - Institute of Economic Research.
  16. 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.
  17. Blackorby, Charles, et al, 1973. "Consistent Intertemporal Decision Making," Review of Economic Studies, Wiley Blackwell, vol. 40(2), pages 239-48, April.
  18. 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.
  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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