Dynamic implications of prospect utility in an overlapping generations model

Abstract

This thesis studies an overlapping generations model in the presence of prospect theory which has scarcely been addressed in macroeconomic growth models. The set up in this thesis provides us a unique steady state with global convergence and multiple steady states with local convergence. The presence of prospect preferences in the utility form leads to the multiplicity even under convex technology. Numerical analysis supports us that cross country income divergence can also be explained by a mechanism in which preference component is altered.