Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/142512
Authors: 
Martins, Ana Paula
Year of Publication: 
2007
Series/Report no.: 
EERI Research Paper Series 07/2007
Abstract: 
The discounting of future felicity flows transposes to the intertemporal optimization context the assumption of interest-bearing wealth or savings. The validity of the hypothesis has been challenged by several empirical (ir)regularities and by the theoretical implications for human decision processing. In particular, it implies a very special weight of past decisions on current welfare prospects, which appears largely inconsistent with forgetfulness – even if not with learning – and memory effects, often stressed or embedded in behavioral science studies. In this article, we explore the modifications induced by generalizing the typical welfare function in order to accommodate such retrospective influences. The idea is simple – and can be thought inspired in felicity functions encompassing habit formation: to allow for accumulated welfare – of hypothetically “compounded” but also depreciating past-to-current felicity streams – to affect the periodic utility function – which therefore enjoy some durable good properties. Sensitivity of the Ramsey optimal path to the new formulation is also inspected. The mathematical principle has useful production theory applications: in supply chain modelling. Then the optimal depth of a production process stems from a standard problem that now also embeds delay evaluation – discounting; a rationale for a particular pattern of the term structure of interest rates was also forwarded. Growth – general equilibrium - models are extended to allow for the hypothesis.
Subjects: 
Time Discount
Time Preference
Interest
Retrospect Theory
Durable Goods
Durable Felicity Functions
Vertical Production Systems
Intertemporal Economies of Depth
Supply Chains
Networks
Complexity
Consistency
Term Structure of Interest Rates
JEL: 
D90
E40
E43
G00
C61
O40
L22
D85
Document Type: 
Working Paper

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