Endogenous discounting and the domain of the felicity function
The objective is to show that endogenous discounting models should use a felicity function constrained to a positive domain. A variety of articles use the Mangasarian or Arrow and Kurz condition as a sufficient condition for optimality, which restricts felicity to a negative domain. Since the level of the felicity function shows up in the optimal path it leads to qualitatively different solutions when one uses a negative or positive felicity function. We suggest reasons why the domain should be positive. We furthermore derive sufficiency conditions for concavity of a transformed Hamiltonian if the felicity function is assumed to be positive.
Year of publication: |
2011
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Authors: | Schumacher, Ingmar |
Published in: |
Economic Modelling. - Elsevier, ISSN 0264-9993. - Vol. 28.2011, 1-2, p. 574-581
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Publisher: |
Elsevier |
Keywords: | Endogenous time preference Optimality Recursive utility Felicity |
Saved in:
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