Working Paper: CEPR ID: DP3949
Authors: Roger E. A. Farmer; Amartya Lahiri
Abstract: We study a class of utility functions that are defined recursively by an aggregator function. In single-agent economies it is known that a sufficient condition for the existence of a balanced growth path is that utility should be homogenous. In the context of a multi-agent economy we show that this restriction implies that either a balanced growth equilibrium fails to exist or all agents have the same constant discount factor. We suggest a generalization of recursive preferences wherein the intertemporal utility function is time dependent. Within this class we establish that there may exist a balanced growth equilibrium even if agents are different. We give an example of our approach in the international context in which time dependence occurs because countries care about their relative position in the world income distribution.
Keywords: Balanced Growth; Endogenous Income Distribution; Recursive Utility
JEL Codes: D11; F40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Homogeneity in utility functions (D11) | existence of a balanced growth path (O40) |
| Different rates of time preference (D15) | degenerate wealth distribution (D31) |
| degenerate wealth distribution (D31) | most patient agent accumulates all wealth (D14) |
| Time-dependent preferences (D15) | balanced growth with heterogeneous preferences (O40) |
| balanced growth equilibria (D50) | non-degenerate wealth distribution (D39) |