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Optimal Growth with Variable Rate of Time Preference

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  • Mausumi Das

    (Delhi School of Economics)

Abstract

In this paper we develop a continuous time infinite horizon optimal growth model with identical households, where the households' rate of time preference is endogenously determined. However, unlike the existing literature, we assume here that the instantaneous discount rate of the representative household is negatively related to its current consumption. With this assumption, we analyze the long run dynamic behaviour of the economy. We show that contrary to the general belief, a negative relationship between the instantaneous discount rate and the household's current consumption does not necessarily result in instability of the dynamic system. We derive a set of sufficient conditions for stability and instability in this context. We also show the possible existence of a poverty trap such that if an economy starts with a per capita income below a certain critical minimum value, then it optimally chooses a consumption-accumulation path such that it faces economic retrogression over time.

Suggested Citation

  • Mausumi Das, 1999. "Optimal Growth with Variable Rate of Time Preference," Working papers 70, Centre for Development Economics, Delhi School of Economics.
  • Handle: RePEc:cde:cdewps:70
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    References listed on IDEAS

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    1. Hanushek, Eric A, 1995. "Interpreting Recent Research on Schooling in Developing Countries," World Bank Research Observer, World Bank Group, vol. 10(2), pages 227-246, August.
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    3. Anne Case & Angus Deaton, 1998. "School quality and educational outcomes in South Africa," Working Papers 993, Princeton University, Woodrow Wilson School of Public and International Affairs, Center for Research on Child Wellbeing..
    4. Duraisamy, P., 1992. "Gender, Intrafamily Allocation of Resources and Child Schooling in South India," Papers 667, Yale - Economic Growth Center.
    5. Paul Glewwe & Hanan Jacoby, 1994. "Student Achievement and Schooling Choice in Low-Income Countries: Evidence from Ghana," Journal of Human Resources, University of Wisconsin Press, vol. 29(3), pages 843-864.
    6. Boissiere, M & Knight, J B & Sabot, R H, 1985. "Earnings, Schooling, Ability, and Cognitive Skills," American Economic Review, American Economic Association, vol. 75(5), pages 1016-1030, December.
    7. Kingdom, G.G. & Unni, J., 1998. "Education and Women's Labour Market Outcomes in India: An Analysis Using NSS Household Data," Economics Series Working Papers 99201, University of Oxford, Department of Economics.
    8. Moulton, Brent R, 1990. "An Illustration of a Pitfall in Estimating the Effects of Aggregate Variables on Micro Unit," The Review of Economics and Statistics, MIT Press, vol. 72(2), pages 334-338, May.
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    Cited by:

    1. Das, Mausumi, 2003. "Optimal growth with decreasing marginal impatience," Journal of Economic Dynamics and Control, Elsevier, vol. 27(10), pages 1881-1898, August.

    More about this item

    Keywords

    Variable time preference; Long run dynamics; Poverty trap.;

    JEL classification:

    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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