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Recursive preferences and balanced growth

  • Farmer, Roger E.A.
  • Lahiri, Amartya

We study a class of utility functions that are defined recursively by an aggregator function. In single-agent economies it is known that a sufficient condition for the existence of a balanced growth path is that utility should be homogenous. In the context of a multi-agent economy we show that this restriction implies that either a balanced growth equilibrium fails to exist or all agents have the same constant discount factor. We suggest a generalization of recursive preferences wherein the intertemporal utility function is time dependent. Within this class we establish that there may exist a balanced growth equilibrium even if agents are different. We give an example of our approach in the international context in which time dependence occurs because countries care about their relative position in the world income distribution.

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Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 125 (2005)
Issue (Month): 1 (November)
Pages: 61-77

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Handle: RePEc:eee:jetheo:v:125:y:2005:i:1:p:61-77
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622869

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  1. Rebelo, Sergio, 1991. "Long-Run Policy Analysis and Long-Run Growth," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 500-521, June.
  2. Dolmas, Jim, 1996. "Balanced-growth-consistent recursive utility," Journal of Economic Dynamics and Control, Elsevier, vol. 20(4), pages 657-680, April.
  3. Epstein, Larry G & Hynes, J Allan, 1983. "The Rate of Time Preference and Dynamic Economic Analysis," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 611-35, August.
  4. Stephanie Schmitt-Grohe & Martin Uribe, 2002. "Closing Small Open Economy Models," NBER Working Papers 9270, National Bureau of Economic Research, Inc.
  5. Tjalling C. Koopmans, 1959. "Stationary Ordinal Utility and Impatience," Cowles Foundation Discussion Papers 81, Cowles Foundation for Research in Economics, Yale University.
  6. Mendoza, Enrique G, 1991. "Real Business Cycles in a Small Open Economy," American Economic Review, American Economic Association, vol. 81(4), pages 797-818, September.
  7. Boud, John III, 1990. "Recursive utility and the Ramsey problem," Journal of Economic Theory, Elsevier, vol. 50(2), pages 326-345, April.
  8. Swan, Trevor W, 2002. "Economic Growth," The Economic Record, The Economic Society of Australia, vol. 78(243), pages 375-80, December.
  9. Lucas, Robert Jr. & Stokey, Nancy L., 1984. "Optimal growth with many consumers," Journal of Economic Theory, Elsevier, vol. 32(1), pages 139-171, February.
  10. T. W. Swan, 1956. "ECONOMIC GROWTH and CAPITAL ACCUMULATION," The Economic Record, The Economic Society of Australia, vol. 32(2), pages 334-361, November.
  11. repec:cup:cbooks:9780521297035 is not listed on IDEAS
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