Non-constant discounting in finite horizon: The free terminal time case

Jesus Marin-Solano and Jorge Navas Rodenes
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Jorge Navas Rodenes: Universitat de Barcelona

No 183, Working Papers in Economics from Universitat de Barcelona. Espai de Recerca en Economia

Abstract: This paper derives the HJB (Hamilton-Jacobi-Bellman) equation for sophisticated agents in a finite horizon dynamic optimization problem with non-constant discounting in a continuous setting, by using a dynamic programming approach. A simple example is used in order to illustrate the applicability of this HJB equation, by suggesting a method for constructing the subgame perfect equilibrium solution to the problem. Conditions for the observational equivalence with an associated problem with constant discounting are analyzed. Special attention is paid to the case of free terminal time. Strotzs model (an eating cake problem of a nonrenewable resource with non-constant discounting) is revisited.

JEL-codes: C61 C73 D83 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2007
New Economics Papers: this item is included in nep-dge
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Journal Article: Non-constant discounting in finite horizon: The free terminal time case (2009)
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