Intertemporal Utility with Heterogeneous Goods and Constant Elasticity of Substitution

Martin Quaas, Stefan Baumgärtner, Moritz Drupp and Jasper N. Meya

No 7999, CESifo Working Paper Series from CESifo

Abstract: We characterize intertemporal utility functions over heterogeneous goods that feature (i) a constant elasticity of substitution between goods at each point in time and (ii) a constant intertemporal elasticity of substitution for at least one of the goods. We find that a standard (stationary) intertemporal utility function is consistent with these two properties if and only if it either is of the intertemporal constant elasticity of substitution (ICES) form, that is, if all elasticities of substitution are identical, or if the instantaneous utility function is Cobb-Douglas. We also characterize the families of standard intertemporal utility functions that feature either (i) or (ii), but not the respective other property. The ICES utility function offers a simple and consistent solution for applications that use constant good-specific intertemporal substitutability. This is, for example, relevant for dual discounting of market and non-market goods.

Keywords: substitutability; CES; CIES; intertemporal utility; non-market goods (search for similar items in EconPapers)
JEL-codes: D15 D61 Q51 (search for similar items in EconPapers)
Date: 2019
New Economics Papers: this item is included in nep-mic, nep-ore and nep-upt
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Journal Article: Intertemporal utility with heterogeneous goods and constant elasticity of substitution (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_7999

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