Consumption Paths under Prospect Utility in an Optimal Growth Model

Foellmi, Reto; Rosenblatt-Wisch, Rina; Schenk-Hoppé, Klaus Reiner (August 2010). Consumption Paths under Prospect Utility in an Optimal Growth Model (Discussion Papers 10-10). Bern: Department of Economics

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This paper studies the Cass-Koopmans-Ramsey model of optimal economic growth in the presence of loss aversion and habit formation. The representative agent’s preferences for consumption can be gradually varied between the standard constant intertemporal elasticity of
substitution (CIES) case and Kahneman and Tversky’s prospect utility. We find that the transitional dynamics of optimal consumption paths differ distinctly from the standard model, in particular consumption smoothing is more pronounced. We also show that prospect utility can cause the economy to remain in a steady state with low consumption and low capital.

Item Type:

Working Paper

Division/Institute:

03 Faculty of Business, Economics and Social Sciences > Department of Economics

UniBE Contributor:

Föllmi, Reto

Subjects:

300 Social sciences, sociology & anthropology > 330 Economics

Series:

Discussion Papers

Publisher:

Department of Economics

Language:

English

Submitter:

Lars Tschannen

Date Deposited:

15 Oct 2020 17:07

Last Modified:

15 Oct 2020 17:07

JEL Classification:

E21, O41

BORIS DOI:

10.7892/boris.145731

URI:

https://boris.unibe.ch/id/eprint/145731

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