INTERTEMPORAL DEPENDENCE, IMPATIENCE, AND DYNAMICS

This paper develops simple geometric methods for analyzing consumer behavior under recursive but intertemporally dependent tastes. Since the preferences studied need not be time-additive, they allow the marginal utility of consumption on a given date to vary with consumption on other dates. Intertemporal dependence is induced by the presence of a variable individual rate of time preference. The optimal consumption responses to transitory and anticipated changes in incomes and interest rates are easily derived and are similar in many respects to the responses implied by the standard, constant time-preference model. Intuitive explanations of the first-order conditions describing optimal paths are provided. © 1990.