In a very influential model with internal habits, Carroll et al., (2017, 2000), establish that an increase in economic growth may cause a positive change in savings. The optimality of this result, and of many other contributions using a similar framework, has been questioned by some authors who have observed that the parametrization used in these models always implies a utility function not jointly concave in consumption and habits. In this paper, we revisit the optimality issue and, using advanced techniques in Dynamic Programming, we answer the following long-standing open questions: (i) Is the solution found in Carroll et al., (2017, 2000) optimal? (ii) Is it also unique or do other optimal solutions exist?

Internal habits formation and optimality / Bambi, M.; Gozzi, Fausto. - In: JOURNAL OF MATHEMATICAL ECONOMICS. - ISSN 0304-4068. - 91:(2020), pp. 165-172. [10.1016/j.jmateco.2020.09.008]

Internal habits formation and optimality

Gozzi F.
2020

Abstract

In a very influential model with internal habits, Carroll et al., (2017, 2000), establish that an increase in economic growth may cause a positive change in savings. The optimality of this result, and of many other contributions using a similar framework, has been questioned by some authors who have observed that the parametrization used in these models always implies a utility function not jointly concave in consumption and habits. In this paper, we revisit the optimality issue and, using advanced techniques in Dynamic Programming, we answer the following long-standing open questions: (i) Is the solution found in Carroll et al., (2017, 2000) optimal? (ii) Is it also unique or do other optimal solutions exist?
Dynamic programming; Endogenous growth; Habit formation; Sufficient conditions of optimality; Viscosity solution
Internal habits formation and optimality / Bambi, M.; Gozzi, Fausto. - In: JOURNAL OF MATHEMATICAL ECONOMICS. - ISSN 0304-4068. - 91:(2020), pp. 165-172. [10.1016/j.jmateco.2020.09.008]
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Utilizza questo identificativo per citare o creare un link a questo documento: http://hdl.handle.net/11385/199539
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