Existence, optimality and dynamics of equilibria with endogenous time preference (Q553526): Difference between revisions

In the standard infinite horizon one-sector model of optimal economic growth with discounting and when time is discrete one assumes that the production function is strictly increasing and concave and the discount factor is constant. This paper departures from this assumptions: it presupposes that the production function is strictly increasing but not necessarily concave; the discount factor is a strictly increasing function of wealth measured by the level of capital. The utility function is assumed to satisfy typical conditions. Some differentiability and limit properties of the above functions are also introduced. It is demonstrated that under these requirements there exist optimal paths and it is established by applying apparatus of the dynamic programming that each optimal path of capital stock is monotonic, convergent to a steady state (possibly to zero) and satisfies the Euler equation. The associated optimal policy function is single-valued, monotonic and almost everywhere differentiable. But one of the main results of the paper is the characterization of behavior of optimal paths when there is multiplicity of equilibria. It is shown that if there are exactly two non-trivial steady states, then there is a threshold level of capital stock \(k^*\) such that if the initial level of the capital stock is strictly greater (less) than \(k^*\) then each optimal path converges to the greater (smaller) steady state; the starting point is \(k^*\) then indeterminacy arises. In the last section of the work it is assumed that the production function is strictly concave and the notion of (dynamic) equilibrium with externality is defined and it is proved that such an equilibrium exists and it is also a competitive equilibrium with externality. Examples of economies meeting assumptions of the model are also presented.