Poverty Traps and Growth in a model of Endogenous Time Preference
نویسنده
چکیده
We introduce endogenous probability of survival in the standard Keynes-Ramsey optimal growth model. An individual’s probability of survival is assumed to be dependent on past levels of consumption. Endogenous probability of survival effectively also implies that the rate of time preference (or degree of patience) of an individual is no longer an exogenously given parameter. We solve the dynamic optimization problem facing an agent and provide a complete characterization of the steady states and their stability properties. We find that with endogenous rate of time preference an economy may have multiple steady state equilibria. The results are interpreted in light of the growth experiences of developing economies. The model can explain why two economies that have identical production technologies and identical preferences may converge to different levels of income depending on initial conditions. We conclude with some policy implications of the model. Journal of Economic Literature Classification Numbers: D91, E21, C62, O40.
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Existence, Optimality and Dynamics of Equilibria with Endogenous Time Preference
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