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Title:Management of a capital stock by Strotz's naive planner PDF Logo
Authors:Tyson, Christopher J.
Issue Date:2007
Series/Report no.:Working Paper, Department of Economics, Queen Mary, University of London 615
Abstract:The capital management problem posed by R. H. Strotz is analyzed for the case of the naive planner who fails to anticipate changes in his own preferences. By imposing progressively stronger restrictions on the primitives of the problem - namely, the discounting function, the utility index function, and the investment technology - the planner's behavior is characterized first as the solution to an ordinary differential equation and then via explicit formulae. Inasmuch as these characterizations leave the discounting function essentially unrestricted, the theory can accommodate, in particular, decision makers who discount time according to the hyperbolic and quasi-hyperbolic curves used in applied work and said to be supported by psychological studies. Comparative statics of the model are discussed, as are extensions of the analysis to allow for credit constraints, limited foresight, and partial commitment.
Subjects:Consumption
Commitment
Hyperbolic discounting
Time preference
JEL:D91
E21
Document Type:Working Paper
Appears in Collections:Working Paper Series, School of Economics and Finance, Queen Mary, University of London

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