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Welfare Effects of Controlling Labor Supply? An Application of the Stochastic Ramsey Model


  • Amilon, Henrik

    () (Department of Economics, Lund University)

  • Bermin, Hans-Peter

    () (Department of Economics, Lund University)


In this paper we extend Merton's (1975) classic stochastic version of the Ramsey model by allowing the government to control the expected growth rate of the labor supply. We characterize the solution to this control problem for general time-separable preferences, and derive an analytical solution for the CRRA case. The results show to what extent the planner, or government, increases consumption and welfare by taking an active role in controlling the economy. We also explore the implications of government control of labor growth for the term structure of interest rates and the effects of taxes on capital.

Suggested Citation

  • Amilon, Henrik & Bermin, Hans-Peter, 2001. "Welfare Effects of Controlling Labor Supply? An Application of the Stochastic Ramsey Model," Working Papers 2001:9, Lund University, Department of Economics, revised 11 Mar 2002.
  • Handle: RePEc:hhs:lunewp:2001_009

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    References listed on IDEAS

    1. Varian, Hal R, 1982. "The Nonparametric Approach to Demand Analysis," Econometrica, Econometric Society, vol. 50(4), pages 945-973, July.
    2. Manser, Marilyn E & McDonald, Richard J, 1988. "An Analysis of Substitution Bias in Measuring Inflation, 1959-85," Econometrica, Econometric Society, vol. 56(4), pages 909-930, July.
    3. Swofford, James L & Whitney, Gerald A, 1987. "Nonparametric Tests of Utility Maximization and Weak Separability for Consumption, Leisure and Money," The Review of Economics and Statistics, MIT Press, vol. 69(3), pages 458-464, August.
    4. Hal R. Varian, 1983. "Non-parametric Tests of Consumer Behaviour," Review of Economic Studies, Oxford University Press, vol. 50(1), pages 99-110.
    5. Rickertsen, Kyrre, 1998. "The demand for food and beverages in Norway," Agricultural Economics, Blackwell, vol. 18(1), pages 89-100, January.
    6. Fisher, Douglas & Fleissig, Adrian R, 1997. "Monetary Aggregation and the Demand for Assets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(4), pages 458-475, November.
    7. Barnett, William A & Choi, Seungmook, 1989. "A Monte Carlo Study of Tests of Blockwise Weak Separability," Journal of Business & Economic Statistics, American Statistical Association, vol. 7(3), pages 363-377, July.
    8. Swofford, James L. & Whitney, Gerald A., 1994. "A revealed preference test for weakly separable utility maximization with incomplete adjustment," Journal of Econometrics, Elsevier, vol. 60(1-2), pages 235-249.
    9. Varian, Hal R., 1985. "Non-parametric analysis of optimizing behavior with measurement error," Journal of Econometrics, Elsevier, vol. 30(1-2), pages 445-458.
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    More about this item


    Utility maximization; Ramsey model; stochastic control; interest rate dynamics; Malliavin calculus;

    JEL classification:

    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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