Consumption Paths under Prospect Utility in an Optimal Growth Model

Reto Foellmi, Rina Rosenblatt-Wisch and Klaus Reiner Schenk-Hopp
Authors registered in the RePEc Author Service: Klaus Reiner Schenk-Hoppé

Diskussionsschriften from Universitaet Bern, Departement Volkswirtschaft

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 find 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)
Date: 2010-08
New Economics Papers: this item is included in nep-dge, nep-fdg and nep-upt
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Citations: View citations in EconPapers (6)

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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:ube:dpvwib:dp1010

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