Existence, optimality and dynamics of equilibria with endogenous time preference
Van, C. L.
Journal of Mathematical Economics
170 - 179
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This paper studies the dynamic implications of the endogenous rate of time preference depending on the stock of capital, in a one-sector growth model. The planner's problem is presented and the optimal paths are characterized. We prove that there exists a critical value of initial stock, in the vicinity of which, small differences lead to permanent differences in the optimal path. Indeed, we show that a development trap can arise even under a strictly convex technology. In contrast with the early contributions that consider recursive preferences, the critical stock is not an unstable steady state so that if an economy starts at this stock, an indeterminacy will emerge. We also show that even under a convex-concave technology, the optimal path can exhibit global convergence to a unique stationary point. The multipliers system associated with an optimal path is proven to be the supporting price system of a competitive equilibrium under externality and detailed results concerning the properties of optimal (equilibrium) paths are provided. We show that the model exhibits globally monotone capital sequences yielding a richer set of potential dynamics than the classic model with exogenous discounting. (C) 2011 Elsevier B.V. All rights reserved.