Ramsey Meets Laibson in the Neoclassical Growth Model

Abstract

The neoclassical growth model is modified to include a variable rate of time preference. With no commitment ability and log utility, the equilibrium features a constant effective rate of time preference and is observationally equivalent to the standard model. The extended framework yields testable linkages between the extent of commitment ability and the rates of saving and growth. The model also has welfare implications, including the optimal design of institutions that facilitate household commitments. Steady-state results are obtained for general concave utility functions, and some properties of the transitional dynamics are characterized for isoelastic utility.