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Endogenous discounting and the domain of the felicity function

  • Schumacher, Ingmar

The objective is to show that endogenous discounting models should use a felicity function constrained to a positive domain. A variety of articles use the Mangasarian or Arrow and Kurz condition as a sufficient condition for optimality, which restricts felicity to a negative domain. Since the level of the felicity function shows up in the optimal path it leads to qualitatively different solutions when one uses a negative or positive felicity function. We suggest reasons why the domain should be positive. We furthermore derive sufficiency conditions for concavity of a transformed Hamiltonian if the felicity function is assumed to be positive.

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Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 28 (2011)
Issue (Month): 1 ()
Pages: 574-581

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Handle: RePEc:eee:ecmode:v:28:y:2011:i:1:p:574-581
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30411

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