Consumption Paths under Prospect Utility in an Optimal Growth Model

Reto Foellmi, Rina Rosenblatt-Wisch and Klaus Schenk-Hoppé

No 10-38, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: 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 nd 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.

Keywords: Ramsey growth model; prospect theory; loss aversion; optimal consumption (search for similar items in EconPapers)
JEL-codes: E21 O41 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2010-08
References: Add references at CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Consumption paths under prospect utility in an optimal growth model (2011)
Working Paper: Consumption Paths under Prospect Utility in an Optimal Growth Model (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1038

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