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Other-regarding Uzawa Preferences and Living Standard Catch-up

  • Ross S. Guest
  • Ian M. McDonald

This paper provides a new rationale for Uzawa preferences; instead of positing that poor people are more patient because they are poor, it posits that poor people should be more patient if they wish their living standards to catch-up with richer people. To provide a setting for this new rationale, the paper studies the socially optimal choice of living standards over time by social planners for countries which, from low levels of total factor productivity (TFP), experience a gradual catch-up of their TFP level with that of the leader country. In the TFP catch-up scenario, the socially optimal choice of consumption and saving based on time additive preferences leads to no catch-up of living standards. To generate living standard catch-up we propose other-regarding Uzawa preferences (ORUP), in which the rate of time preference is influenced by the gap in living standards between follower country and leader country. This other-regarding specification is consistent with recent findings emphasised in behavioural economics. The ORUP form is illustrated quantitatively by simulating a model of the world economy.

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Paper provided by DEGIT, Dynamics, Economic Growth, and International Trade in its series DEGIT Conference Papers with number c012_034.

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Length: 39 pages
Date of creation: Jun 2007
Date of revision:
Handle: RePEc:deg:conpap:c012_034
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  1. Kyung-Mook Lim & David N. Weil, 2003. "The Baby Boom and the Stock Market Boom," Scandinavian Journal of Economics, Wiley Blackwell, vol. 105(3), pages 359-378, 09.
  2. David M. Cutler & James M. Poterba & Louise M. Sheiner & Lawrence H. Summers, 1990. "An Aging Society: Opportunity or Challenge?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 21(1), pages 1-74.
  3. Ross Guest & Ian Mcdonald, 2003. "Vintage versus homogeneous capital in simulations of population ageing: does it matter?," Applied Economics Letters, Taylor & Francis Journals, vol. 10(3), pages 149-153.
  4. Miles, David, 1999. "Modelling the Impact of Demographic Change upon the Economy," Economic Journal, Royal Economic Society, vol. 109(452), pages 1-36, January.
  5. Fehr, Ernst & Schmidt, Klaus M., 1998. "A Theory of Fairness, Competition and Cooperation," CEPR Discussion Papers 1812, C.E.P.R. Discussion Papers.
  6. Bruno S. Frey & Alois Stutzer, 2002. "What Can Economists Learn from Happiness Research?," Journal of Economic Literature, American Economic Association, vol. 40(2), pages 402-435, June.
  7. Guest, Ross S & McDonald, Ian M, 2001. "Ageing, Optimal National Saving and Future Living Standards in Australia," The Economic Record, The Economic Society of Australia, vol. 77(237), pages 117-34, June.
  8. repec:fth:harver:1490 is not listed on IDEAS
  9. Douglas W. Elmendorf & Louise M. Sheiner, 2000. "Should America Save for Its Old Age? Fiscal Policy, Population Aging, and National Saving," Journal of Economic Perspectives, American Economic Association, vol. 14(3), pages 57-74, Summer.
  10. Harald Uhlig & Lars Ljungqvist, 2000. "Tax Policy and Aggregate Demand Management under Catching Up with the Joneses," American Economic Review, American Economic Association, vol. 90(3), pages 356-366, June.
  11. Robert E. Lucas, 2000. "Some Macroeconomics for the 21st Century," Journal of Economic Perspectives, American Economic Association, vol. 14(1), pages 159-168, Winter.
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